ECO101H1 Lecture Notes - Lecture 12: Diminishing Returns, Marginal Product, Production Function

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Production function: relates output to quantity of inputs (capital, labour) Short-run: one input (capital) is fixed, while one input (labour) can vary. Long-run: all inputs (capital, labour) can vary. Short-run: gm can vary amount of labour (overtime, lay-offs), gm cannot vary number of plants (capital) Long-run: gm can vary number of plants and amount of labour. Law of diminishing returns: the marginal product of a variable input, in the presence of a fixed input, eventually diminishes. Total cost (tc): total of all costs. Total fixed cost (tfc): total cost of fixed input. Total variable cost (tvc): total cost of variable input. **marginal cost (mc): increase in total cost / increase in output. *note: this is the key link between the production function and cost: mc and atc are the key cost schedules. *note: mc intersects atc schedule at its minimum point. Atc = tc / q = afc + atc.

Related Questions

1. The slope of the total product curve measures

a. the marginal rate of technical substitution.

b. marginal product.

c. average product.

d. the maximum average product.

e. minimum product.

2. The Law of Diminishing Returns to a variable input (such as labor) assumes that

a. there is at least one fixed input.

b. all inputs are changed by the same percentage.

c. the firm is operating in the short run.

d. all inputs are held constant.

e. a and c.

3. An isoquant curve identifies

a. the maximum output possible, given a fixed budget.

b. the different combinations of goods the can be produced, given fixed amounts of inputs.

c. the different combinations of inputs that can be used to produce a fixed rate of output.

d. none of the above.

4. The ratio of total productivity to the total quantity of a variable input being used in production is

a. equal to marginal physical productivity of the input.

b. constant as employment levels of the input vary.

c. equal to average physical productivity of the input.

d. equal to the marginal rate of technical substitution.

The law of eventually diminishing marginal returns: (Points : 1)

a. states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns.
b. is a mathematical theorem that can be logically proved or disproved
c. is the rate at which one input may be substituted for another input in the production process
d. None of the above

The marginal product is defined as: (Points : 1)

a. the ratio of total output to the amount of the variable input used in producing the output
b. the incremental change in total output that can be produced by the use of one more unit of the variable input in the production process
c. the percentage change in output resulting from a given percentage change in the amount of the variable input X employed in the production process with Y
d. None of the above

The rate at which one input X may be substituted for another input Y in a production process, while total output remains constant, is: (Points : 1)

a. the slope of the isoquant curve
b. the marginal rate of technical substitution

c. equal to MPx/MPy

d. all of the above
e. none of the above

Marginal revenue product is: (Points : 1)

a. defined as the amount that an additional unit of the variable input adds to the total revenue
b. equal to the marginal factor cost of the variable factor times the marginal revenue resulting from the increase in output obtained
c. equal to the marginal product of the variable factor times the marginal product resulting from the increase in output obtained
d. a and b
e. a and c

Marginal factor cost is defined as the amount that an additional unit of the variable unit of the variable input adds to ____________. (Points : 1)

a. marginal cost
b. variable cost
c. marginal rate of technical substitution
d. total cost
e. none of the above

In the Cobb-Douglas production function Q=aL^?1.K^?2 ______________. (Points : 1)

a. the marginal product of labor (L) is equal to ?1
b. the average product of labor (L) is equal to ?2
c. if the amount of labor input (L) is increased by 1 percent, then output will increase by ?1 percent
d. a and b
e. a and c

The short-run cost function is: (Points : 1)

a. where all inputs to the production process are available
b. relevant to decisions in which one or more inputs to the production process are fixed
c. not relevant to optimal pricing and production output decision facilities
d. crucial in making optimal investment decisions in new production facilities
e. none of the above

Theoretically, in a long-run cost function: (Points : 1)

a. all inputs are fixed
b. all inputs are considered variable
c. some inputs are always fixed
d. capital and labor are always combined in fixed proportions

A linear total cost function implies that: (Points : 1)

a. marginal costs are constant as output increases
b. average total costs are continually decreasing as output increases
c. a and b
d. none of the above

The following table summarizes the short-run production function for your firm. Your product sells for $8 per unit, labor costs $12 per unit, and the rental price of capital is $20 per unit. Complete the following table and then answer the accompanying questions.

1. Which inputs are fixed inputs? Which are variable inputs?

2. What is the variable cost of producing 60 units of output?

3. How many units of the variable input should be used to maximize profits? Why?

4. What are your maximum profits?

5. Over what range of variable input usage does increase marginal returns exist?

6. Over what range of variable input usage do decrease marginal returns exist?

Output	Units of Capital	Units of Labor	Marginal Product of Labor	MRP of Labor
0	6	0	--
10	6	1
30	6	2
60	6	3
80	6	4
90	6	5
95	6	6
95	6	7
90	6	8
80	6	9
60	6	10
30	6	11

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ECO101H1 Lecture Notes - Lecture 12: Diminishing Returns, Marginal Product, Production Function

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