Inputs and Production

Question 1

What are factors of production?

Answer 1

The productive resources or inputs that firms use to manufacture resources.

Question 2

What is output? What is production and what is the influence of technology?

Answer 2

Output is the amount of goods and services the firm produces. Production transforms a set of inputs into a set of outputs. Technology determines the quantity of output that is feasible for a given set of inputs.

Question 3

What is the production function?

Answer 3

The production function tells us the maximum possible output a firm can achieve for any given quantity of inputs. Q = f(L,K)

Question 4

What is the production set?

Answer 4

The production set is a set of technically feasible combination of inputs and outputs.

Question 5

What is the labour requirement function?

Answer 5

L = g(Q) The labour requirement function is obtained by inverting the production function.

Question 6

What is total product?

Answer 6

Single input production functions with just labour or just capital are sometimes called total production functions.

Question 7

What is marginal product?

What is the formula for the marginal product of laborur?

Answer 7

The marginal product of an input is the change in output that results from a change in an input holding the levels of all other inputs constant.

Question 8

What is average product?

What is the formula for average product?

Answer 8

The average product of an input is equal to the total output that is produced divided by the quantity of the input that is used in its production.

Question 9

What is the law of diminishing marginal returns?

Answer 9

The law states that marginal products eventually decline as the quantity used of a single input increases.

Question 10

What are isoquants?

What is the slope of an isoquant?

Answer 10

An isoquant traces out all combinations of inputs that allow the firm to produce the same quantity of output.

Question 11

What is the marginal rate of technical substitution?

What is the formula?

Answer 11

The marginal rate of technical substitution of labour for capital measures the amount of an input K, the firm would be willing to sacrifice in exchange for using one more unit of another input L in order to produce the same output as before.

Question 12

What is the marginal rate of technical substitution? What is the formula?

Answer 12

The marginal rate of technical substitution of labour for capital measures the amount of an input K, the firm would be willing to sacrifice in exchange for using one more unit of another input L in order to produce the same output as before.

Question 13

How can the marginal rate of technical substitution be related to the marginal products? (3) Formula?

Answer 13

If both marginal products are positive, the slope of the isoquant is negative. 2) If we have diminishing marginal returns this means we have a diminishing marginal rate of technical substitution. 3The marginal rate of technical substitution of labour for capital is diminishing as the quantity of labour increases.

Question 14

What is the elasticity of substitution? Formula?

Answer 14

This is a measure of how easy it is for a firm to substitute labour for capital. The percentage change in the capital-labour relation for every one percentage change in the MRTS along along an isoquant.

Question 15

What is a linear production function?

What can be said about the MRTS and the elasticity of substitution?

Answer 15

Linear production functions are perfect substitutes. MRTS is constant. The elasticity of substitution for a linear production function is infinity.

Question 16

What is a fixed proportion production function? What is the elasticity?

Answer 16

Fixed proportion production functions are perfect complements. The elasticity is zero.

Question 17

What is a Cobb-Douglas production function? What is the elasticity?

Answer 17

For Cobb-douglas production function, the elasticity is always one.

Question 18

What is the distinction between returns to scale and marginal returns?

Answer 18

Returns to scale: all inputs increase. Marginal returns: increase in the quantity of a single input holding all other constant. The marginal returns of a single factor may decrease while the returns to scale do not. Returns to scale can be different at different levels of production.

Question 19

How does technological progress affect the production function?

Answer 19

Technological progress shifts the production function by allowing a firm to produce more output from a given combination of inputs or same level of output with fewer inputs.

Question 20

How would it be possible to know if technological progress is labour saving? (3)

Answer 20

1) By looking at the isoquants for a given level of output before and after the technological chnage it is possible to see whether it results in labour savings. 2) By drawing a ray from the origin that intersects the isoquants, we can examine how the MRTS changes. 3) If the MRTS falls along the ray, we have labour saving technological progress.

Question 21

How would it be possible to know if technological progress is capital saving?

Answer 21

If the MRTS increases along the ray drawn intersecting the isoquants, technological progress is capital saving.

Question 22

What is neutral technological progress? (3)

Answer 22

1) The isoquant corresponding to a given level of output shifts inward. 2) MRTS remains unchanged along any ray from the origin. 3) Each isoquant retains the same shape.