Chapter 6: Production

CHAPTER 6
REVIEW QUESTIONS
1. What is a production function? How does a long-run production function differ from a
short-run production function?
A production function represents how inputs are transformed into outputs by a firm.
We focus on the firm with one output and aggregate all inputs or factors of production
into one of several categories, such as labor, capital, and materials. In the short run,
one or more factors of production cannot be changed. As time goes by, the firm has the
opportunity to change the levels of all inputs. In the long-run production function, all
inputs are variable.
2. Why is the marginal product of labor likely to increase and then decline in the short
run?
When additional units of labor are added to a fixed quantity of capital, we see the
marginal product of labor rise, reach a maximum, and then decline. The marginal
product of labor increases because, as the first workers are hired, they may specialize
in those tasks in which they have the greatest ability. Eventually, with the quantity of
capital fixed, the workplace becomes congested and the productivity of additional
workers declines.
3. Diminishing returns to a single factor of production and constant returns to scale are
not inconsistent. Discuss.
Diminishing returns to a single factor are observable in all production processes at
some level of inputs. This fact is so pervasive that economists have named it the law
of diminishing marginal productivity. If there is diminishing marginal productivity,
at least one factor of production is held constant. For example, when holding the level
of capital constant, each additional unit of labor has less capital to work with.
Unlike the returns to a single factor, returns to scale are proportional increases in all
inputs. While each factor by itself exhibits diminishing returns, output increases more
than proportionately (increasing returns to scale), proportionately (constant returns to
scale), or proportionally less (decreasing returns to scale).
4. You are an employer seeking to fill a vacant position on an assembly line. Are you more
concerned with the average product of labor or the marginal product of labor for the last
person hired?

If you observe that your average product is just beginning to decline,

should you hire any more workers? What does this situation imply about the marginal
product of your last worker hired?
In filling a vacant position, you should be concerned with the marginal product of the
last worker hired because the last worker hired will influence total product. The point
at which the average product begins to decline is the point where average product is
equal to marginal product. Although adding more workers results in a further decline
in average product, total product continues to increase. Only when total product
declines do we necessarily stop hiring. When average product declines, the marginal
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Chapter 6: Production
product of the last worker hired is lower than the average product of previously hired
workers.
5. Faced with constantly changing conditions, why would a firm ever keep any factors
fixed? What determines whether a factor is fixed or variable?
Whether a factor is fixed or variable depends on the time horizon in consideration: all
factors are fixed in the very short run; all factors are variable in the long run.
Therefore, the firm must, by definition, have one or more factors fixed in the short run.
As stated in the text: All fixed inputs in the short run represent outcomes of previous
long-run decisions based on firms estimates of what they could profitably produce and
sell.
6.

How does the curvature of an isoquant relate to the marginal rate of technical

substitution?
The isoquant represents the trade-off between inputs in production while holding
output constant. The curvature of the isoquant represents the change in this trade-off
as inputs are added or subtracted. The marginal rate of technical substitution is the
slope of the isoquant. One can show that this slope is equal to the ratio of the marginal
rates of productivity for the respective inputs. The marginal rate of technical
substitution changes with different levels of each input because of declining marginal
productivity. The marginal rate of technical substitution changes at different input
levels, thus forming the isoquant in its typical curved shape.
If inputs are perfect substitutes, the ratio of marginal productivities is constant and
the isoquant is linear. If the inputs are perfect complements, an addition unit of one
input does not increase output, unless there is a complementary addition of the other
input. This case leads to an L-shaped isoquant in which the slope of the horizontal
segment is zero and the slope of the vertical segment is undefined.
7.

Can a firm have a production function that exhibits increasing returns to scale,

constant returns to scale, and decreasing returns to scale as output increases? Discuss.
Most firms have production functions that exhibit increasing, constant, and decreasing
returns to scale. At low levels of output, proportional increases in all inputs may lead
to larger-than-proportional increases in output due to increased opportunities for
specialized factors of production. As the firm grows, it may duplicate its level of
operation such that output increases at the same rate as the increased use of all
inputs. At some scale, the firm experiences an inability to increase output at the same
rate as increases in input, a situation that can arise from management diseconomies.
8. Give an example of a production process in which the short run involves a day or a
week and the long run any period longer than a week.
Any small business where one input requires more than a week to change would be an
example. The process of hiring more labor, which requires announcing the position,
interviewing applicants, and negotiating terms of employment, can take a day, if done
through a temporary employment agency. Usually, however, the process takes a week
or more. Expansion, requiring a larger location, will also take longer than a week.
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Chapter 6: Production

EXERCISES
1. Suppose a chair manufacturer is producing in the short run when equipment is fixed.
The manufacturer knows that as the number of laborers used in the production process
increases from 1 to 7, the number of chairs produced changes as follows: 10, 17, 22, 25, 26,
25, 23.
a.

Calculate the marginal and average product of labor for this production function.
The average product of labor, APL, is equal to
is equal to

Q
. The marginal product of labor, MPL,
L

Q
, the change in output divided by the change in labor input. For this
L

production process we have:

b.

APL

MPL

__

__

10

10

10

17

8 1/2

22

7 1/3

25

6 1/4

26

5 1/5

25

4 1/6

-1

23

3 2/7

-2

Does this production function exhibit diminishing returns to labor? Explain.

This production process exhibits diminishing returns to labor characteristic of all
production functions with one fixed input. The first worker has a marginal product of
10; from the second to the fifth workers, the marginal product is declining, but still
positive. The sixth and seventh workers have negative marginal products.

c.

Explain intuitively what might cause the marginal product of labor to become
negative.
Labors negative marginal product for L > 5 may arise from congestion in the chair
manufacturers factory. Since more laborers are using the same, fixed amount of
capital, it is possible that they could get in each others way, decreasing efficiency and
the amount of output.

2. Fill in the gaps in the table below.

Quantity of

Total

Marginal Product

Average Product

Variable Input

Output

of Variable Input

of Variable Input

___

___

0
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Chapter 6: Production
1

150

200

200

760

150

Quantity of
Variable Input

3.

150

Total
Output

Marginal Product
of Variable Input

Average Product
of Variable Input

___

___

150

150

150

400

250

200

600

200

200

760

160

190

910

150

182

900

-10

150

A political campaign manager has to decide whether to emphasize television

advertisements or letters to potential voters in a reelection campaign.

Describe the

production function for campaign votes. How might information about this function (such
as the shape of the isoquants) help the campaign manager to plan strategy?
The output of concern to the campaign manager is the number of votes. The
production function uses two inputs, television advertising and direct mail. The use of
these inputs requires knowledge of the substitution possibilities between them. If the
inputs are perfect substitutes, the resultant isoquants are line segments, and the
campaign manager will use only one input based on the relative prices. If the inputs
are not perfect substitutes, the isoquants will have a convex shape. The campaign
manager will then use a combination of the two inputs.
4.

A firm has a production process in which the inputs to production are perfectly

substitutable in the long run.

Can you tell whether the marginal rate of technical

substitution is high or low, or is further information necessary? Discuss.

The marginal rate of technical substitution, MRTS, is the absolute value of the slope of
an isoquant. If the inputs are perfect substitutes, the isoquants will be linear. To
calculate the slope of the isoquant, and hence the MRTS, we need to know the rate at
which one input may be substituted for the other.
5. The marginal product of labor is known to be greater than the average product of labor
at a given level of employment. Is the average product increasing or decreasing? Explain.
If the marginal product of labor, MPL, is greater than the average product of labor,
APL, then each additional unit of labor is more productive than the average of the
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Chapter 6: Production
previous units. Therefore, by adding the last unit, the overall average increases. If
MPL is greater than APL, then APL is increasing. If the MPL is lower than the APL,
then the last unit reduces the average. The APL is at a maximum when the
productivity of the last unit is equal to the average of the previous units ( i.e., when
MPL = APL).
6. The marginal product of labor in the production of computer chips is 50 chips per hour.
The marginal rate of technical substitution of hours of labor for hours of machine-capital
is 1/4. What is the marginal product of capital?
We know that factors of production are utilized efficiently by a firm at the point where
the production process equates the ratio of the marginal product to the marginal rate
of technical substitution. Here, we are given the marginal product of labor and the
marginal rate of technical substitution. To determine the marginal product of capital,
substitute the given values for the marginal product of labor and the marginal rate of
technical substitution into the following formula:

MPL

MPK

MRTS, or

50
1
, or
MPK 4

MPK = 200 computer chips per hour.

7.

Do the following production functions exhibit decreasing, constant or increasing

returns to scale?
a.

Q = 0.5KL
Returns to scale refers to the relationship between output and proportional increases
in all inputs. This concept may be represented in the following manner, where
represents a proportional increase in inputs:
F(K, L) > F(K, L) implies increasing returns to scale;
F(K, L) = F(K, L) implies constant returns to scale; and
F(K, L) < F(K, L) implies decreasing returns to scale.
Therefore, we can substitute K for K and L for L, and check the result against an
equal increase in Q.
Q* = 0.5(K)(L) = (0.5KL)2 = Q2 > Q
This production function exhibits increasing returns to scale.

b.

Q = 2K + 3L
Q* = 2(K) + 3(L) = (2K + 3L) = Q = Q.
This production function exhibits constant returns to scale.

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Chapter 6: Production
8.

The production function for the personal computers of DISK, Inc., is given by Q =

10K0.5L0.5, where Q is the number of computers produced per day, K is hours of machine
time, and L is hours of labor input.

DISKs competitor, FLOPPY, Inc., is using the

production function Q = 10K L .

0.6

a.

0.4

If both companies use the same amounts of capital and labor, which will generate
more output?
Let Q be the output of DISK, Inc., Q2, be the output of FLOPPY, Inc., and X be the
same equal amounts of capital and labor for the two firms. Then, according to their
production functions,
Q = 10X0.5X0.5 = 10X(0.5 + 0.5) = 10X
and
Q2 = 10X0.6X0.4 = 10X(0.6 + 0.4) = 10X.
Because Q = Q2, both firms generate the same output with the same inputs.

b.

Assume that capital is limited to 9 machine hours but labor is unlimited in supply.
In which company is the marginal product of labor greater? Explain.
With capital limited to 9 machine units, the production functions become Q 30L0.5
and Q2 37.37L0.4. To determine the production function with the highest marginal
productivity of labor, consider the following table:
L

Q
Firm 1

MPL
Firm 1

Q
Firm 2

MPL
Firm 2

0.0

___

0.00

___

30.00

30.00

37.37

37.37

42.43

12.43

49.31

11.94

51.96

9.53

58.00

8.69

60.00

8.04

65.07

7.07

For each unit of labor above 1, the marginal productivity of labor is greater for the first
firm, DISK, Inc.
9. In Example 6.3, wheat is produced according to the production function Q = 100(K0.8L0.2 ).
a.

Beginning with a capital input of 4 and a labor input of 49, show that the marginal
product of labor and the marginal product of capital are both decreasing.
For fixed labor and variable capital:
K = 4 Q = (100)(40.8 )(490.2 ) = 660.21
K = 5 Q = (100)(50.8 )(490.2 ) = 789.25 MPK = 129.04
K = 6 Q = (100)(60.8 )(490.2 ) = 913.19 MPK = 123.94
K = 7 Q = (100)(70.8 )(490.2 ) = 1,033.04 MPK = 119.85.
For fixed capital and variable labor:
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Chapter 6: Production
L = 49 Q = (100)(40.8 )(490.2 ) = 660.21
L = 50 Q = (100)(40.8 )(500.2 ) = 662.89 MPL = 2.68
L = 51 Q = (100)(40.8 )(510.2 ) = 665.52 MPL = 2.63
L = 52 Q = (100)(40.8 )(520.2 ) = 668.11 MPL = 2.59.
Notice that the marginal products of both capital and labor are decreasing as the
variable input increases.
b.

Does this production function exhibit increasing, decreasing, or constant returns to

scale?
Constant (increasing, decreasing) returns to scale imply that proportionate increases
in inputs lead to the same (more than, less than) proportionate increases in output. If
we were to increase labor and capital by the same proportionate amount (l) in this
production function, output would change by the same proportionate amount:
Q = 100(K)0.8 (L)0.2, or
Q = 100K0.8 L0.2 (0.8 + 0.2) = Q
Therefore, this production function exhibits constant returns to scale.

65