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Terms in this set (23)
Why is the marginal product of labor likely to increase initially in the short run as more of the variable input is hired?
Initially workers are able to specialize, but after a certain number of workers have been added, gains from specialization will be exhausted and diminishing marginal returns will set in.
Why does production eventually experience diminishing marginal returns to labor in the short run?
Since at least one factor of production is fixed in the short run, as more and more workers must share the fixed factors, the marginal product of each additional worker will eventually decrease.
Which of the following is an example of the law of diminishing marginal returns?
Holding capital constant, when the amount of labor increases from 5 to 6, output increases from 20 to 25. Then when labor increases from 6 to 7, output increases from 25 to 28.
What is the difference between a production function and an isoquant?
A production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of output.
The slope, or the MRTS, is constant. This means that the same number of units of one input can always be exchanged for a unit of the other input and output can be maintained. The inputs are perfect substitutes.
Linear isoquant
Within some range, a declining number of units of one input can be substituted for a unit of the other input, and output can be maintained at the same level. In this case, the MRTS is diminishing as we move down along the isoquant.
Convex isoquant
The inputs are perfect complements, or that the firm is producing under a fixed proportions type of technology. In this case, the firm cannot give up one input in exchange for the other and still maintain the same level of output.
L-shaped isoquant
Can an isoquant ever slope upward? Explain.
No. It would imply that adding more of both inputs keeps output constant.
Explain the term "marginal rate of technical substitution."
The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant.
What does a MRTS = 6 mean?
the input on the horizontal axis is increased by one unit, then the input on the vertical axis decreases by 6 units and output will
not change
.
Explain why the marginal rate of technical substitution is likely to diminish as more and more labor is substituted for capital.
The substitution of labor for capital decreases the MP Subscript Upper LMPL and increases the MP Subscript Upper KMPK. Since the MRTS is the ratio of the former to the latter, it will diminish as this substitution occurs.
If a production function has straight line isoquants, then
the inputs are perfect substitutes.
When capital is plotted on the vertical axis and labor is plotted along the horizontal axis, the marginal rate of technical substitution (MRTS) of labor for capital along a convex isoquant
equals the negative of the slope of the isoquant, equals the marginal product of labor divided by the marginal product of capital, declines as more and more labor is used.
The production function q = L / 2 is associated with
constant returns to scale
The production function q = L^2 + L
increasing returns to scale
The production function q = log(L)
first increasing and then decreasing returns to scale
q = 3L + 2K
The production function exhibits CONSTANT RETURNS TO SCALE. The marginal product of labor is CONSTANT and the marginal product of capital is CONSTANT
q = (2L + 2K)^(1/2)
The production function exhibits
DECREASING RETURNS TO SCALE The marginal product of labor is DECREASING and the marginal product of capital is DECREASING
.
q = 3LK^(2)
The production function exhibits
increasing RETURNS TO SCALE. The marginal product of labor is CONSTANT
and the marginal product of capital is
INCREASING
.
q = L^(1/2) K^(1/2)
The production function exhibits
CONSTANT RETURNS TO SCALE. The marginal product of labor is DECREASING and the marginal product of capital is DECREASING
.
q = 4L^(1/2) + 4K
The production function exhibits
DECREASING RETURNS TO SCALE. The marginal product of labor is DECREASING and the marginal product of capital is CONSTANT
Example of a sunk cost
The amount a company originally paid for specialized equipment for a plant.
What is the difference between economies of scale and returns to scale?
Economies of scale define how cost changes with output, and returns to scale define how output changes with input usage.
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