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Tutorial 3 Production

The document outlines various concepts in production theory, including returns to scale, optimal input levels for maximizing output, and the elasticity of substitution in production functions. It also discusses the implications of hiring practices and the relationship between average and marginal products. Additionally, it touches on technical progress and its significance in education policy.

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Dean Mwaanga
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11 views1 page

Tutorial 3 Production

The document outlines various concepts in production theory, including returns to scale, optimal input levels for maximizing output, and the elasticity of substitution in production functions. It also discusses the implications of hiring practices and the relationship between average and marginal products. Additionally, it touches on technical progress and its significance in education policy.

Uploaded by

Dean Mwaanga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial 3: Production

1. A firm produces its output using the following process:


𝑄 = 𝐾10.3 𝐾20.3 𝐿0.3
Does this function exhibit increasing, decreasing or constant returns to scale. Does it fail to
satisfy diminishing marginal returns?
2. A firm maximizes output:

Where 𝛼, 𝛽 > 0 and 𝛼 + 𝛽 ≤ 1, subject to the cost constraint:


𝑤𝐿 + 𝑟𝐾 = 𝐶
Find the optimal level of capital and labor that maximizes output.
3. Given the Cobb-Douglas production function:
𝑄 = 𝐾 𝛼 𝐿𝛽
a. Show that the elasticity of substitution is 1.
b. Given that 𝛼 = 0.5 and 𝛽 = 0.7, does the production function exhibit constant,
decrease and increasing returns to scale.
4. Suppose that a firm with the production function:
𝑄 = min (2𝐾, 3𝐿)
Is currently using 6 units of capital and 5 units of labor.
a. What are the marginal products of K and L? Find the efficient path of expansion.
b. Does the production function exhibit increasing, decreasing or constant returns to
scale?
5. Suppose the marginal product of labor is currently equal to its average product. Imagine
you are one of 10 new workers the firm is about to hire, why might you and your potential
new employer have differing views on whether you should be paid according to your
marginal product or your average product. Explain.
6. When Paul Samuelson switched from Physics to Economics, Robert Solow is said to have
remarked than the average IQ in both disciplines went up. A bystander responded that
Solow’s claim must be wrong because it implies that average IQ for academia as a whole
(which is the weighted average of the average IQ levels for each discipline) must also have
gone up as a result of the switch, which is clearly impossible. Was the bystander correct?
Explain. (and if you don’t know who these economists are, be sure to google them and find
out!)
7. Given a CES production function:
1
𝑌 = (𝑥1𝜃 + 𝑥2𝜃 )𝜃
Find the elasticity of substitution.
8. Explain technical progress and give some examples that determine it. Why should
governments worry about quality than quantity in education provision?

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