October 15, 2013 Economics 203: Intermediate Microeconomics I Lab Exercise #3 Section A: Test Your Understanding True or False?

1) The long run refers to a period when all inputs are variable and none is fixed. 2) The average product of an input is the addition to the total output due to the addition of the last unit of input used, the quantity of other inputs used being held constant. 3) The law of diminishing marginal returns is not applicable to cases in which there is a proportional increase in all inputs. Section B: Questions Question 1: Sketch the graph of a "standard " short-run production function, and identify on it the points where the average product peaks(A), the marginal product peaks(B), the marginal product reaches zero(C), and the average and marginal product intersect(D). Question 2: Which of the following production functions exhibits increasing returns to scale? A) Q = K1/2Ll/2 B) Q = Kl/2L2/3 C) Q = Kl/4Ll/3 D) Q = K/L Question 3: A representative isoquant for perfect complements is A) L-shaped. B) a straight line. C) a ray passing through the origin. D) concave. E) not necessarily any of the above. Question 4: The production function for calculators is Q = 12L2 - L3, where Q is in calculators /day and L is in labour-days /day. Show all your work for the following question. Give the equation for the marginal product of labour (MPL), and its value when L = 6 labour-days/day. Question 5: The production function for gravel is Q = 10L1/2K1/2 (where Q is in units, L is in labourdays, and K is in machine-days). With L on the horizontal axis and K on the vertical axis, give the formula for the MRTS of the relevant isoquant for any given combination of inputs (K, L), and give the value of the MRTS when L= 9 labour-days and K = 16 machine-days.

Solutions Section A: Test Your Understanding True or False? 1) The long run refers to a period when all inputs are variable and none is fixed. True 2) The average product of an input is the addition to the total output due to the addition of the last unit of input used, the quantity of other inputs used being held constant. False 3) The law of diminishing marginal returns is not applicable to cases in which there is a proportional increase in all inputs. True Section A: 1. Sketch the graph of a "standard " short-run production function, and identify on it the points where the average product peaks(A), the marginal product peaks(B), the marginal product reaches zero(C), and the average and marginal product intersect(D). Ans: The average product of labour peaks at the output level where the ray from the origin is tangent to the total product curve, where it equals the marginal product of labour (at A=D). The marginal product peaks at the output level corresponding to the inflection point on the total product curve (at B), and the marginal product reaches zero when the total product peaks (at C).

Question 2: Which of the following production functions exhibits increasing returns to scale? A) Q = K1/2Ll/2 B) Q = Kl/2L2/3 C) Q = Kl/4Ll/3 D) Q = K/L Ans: B Question 3: A representative isoquant for perfect complements is A) L-shaped. B) a straight line. C) a ray passing through the origin. D) concave. E) not necessarily any of the above. Ans: A Question 4: The production function for calculators is Q = 12L2 - L3, where Q is in calculators /day and L is in labour-days /day. Show all your work for the following questions. Give the equation for the marginal product of labour (MPL), and its value when L = 6 labour-days/day. Ans: MPL = 24L - 3L2 , which equals 36 calculators/labour-day when L = 6 labourdays/day. Question 5 : The production function for gravel is Q = 10L1/2K1/2 (where Q is in units, L is in labourdays, and K is in machine-days). With L on the horizontal axis and K on the vertical axis, give the formula for the MRTS of the relevant isoquant for any given combination of inputs (K, L), and give the value of the MRTS when L= 9 labour-days and K = 16 machine-days.

MPL 5 L1/ 2 K1/ 2 K 16 MRTS MPK 5 L1/ 2 K1/ 2 L 9

October 15, 2013 Name:_________________________ Student #:__________________ Lab Section B04/B05/B06 Lab #3 Quiz Solutions 1. If equal increments of a variable input are combined with a fixed input, A) the increments to output will eventually increase. B) the additions to output will be constant. C) total cost will eventually decrease. D) output will eventually increase at a decreasing rate. Ans: D 2. The marginal product of a variable input is A) zero at the point of diminishing returns. B) the change in average product that occurs when the variable input is increased by one unit. C) the change in the total product that occurs in response to a unit change in the variable input. D) the second derivative of the total product function. E) more than one of the above. Ans: C 3. The average product of a variable input A) decreases at an increasing rate. B) is the sum of the individual marginal cost curves. C) is the change in the total product that occurs when the variable input increases by one unit. D) is the total product divided by the quantity of the variable input. E) necessarily increases initially and subsequently diminishes. Ans: D 4. (3 marks) SuperBlast Cola (the soft drink with 10 times the regular amount of caffeine, for those all-night study-thons!) can be produced using either of two production processes: Q1 = LK1/2 or Q2 = L3/4 K3/4. a. For each production process, state whether it is characterized by constant, increasing, or decreasing returns to scale, and whether it displays constant, increasing, or diminishing marginal productivity of labour and of capital. Ans: a. Both production processes are characterized by increasing returns to scale: doubling both inputs increases output by a factor of 23/2, or 2 2 ( 2.828). Q1 has a diminishing MPK (MPK = .5LK-1/2) and a constant MPL (MPL = K), while Q2 has a diminishing MPK (MPK = .75L3/4K-1/4) and a diminishing MPL (MPL = .75K3/4L-1/4).

b. Calculate Q1 and Q2 when L = K = 1 and when L = K = 16. b. When L = K = 1, then Q1 = Q2 = 1 unit of SuperBlast, and when L = K = 16, then Q1 = Q2 = 64 units of SuperBlast. c. Give the formulas for Q1 and Q2 as functions of L when K = 16, and then calculate the formulas for MPL in each case. For what values of L is Q1 < Q2? For what values of L is Q1 = Q2? For what values of L is Q1 > Q2? c. If K = 16 units, then Q1 = 4L, while Q2 = 8L3/4. Hence for process 1, MPL = 4, while for process 2, MPL = 6L-1/4. Q1 < Q2 for 0 < L < 16 labour-units, Q1 = Q2 for L = 16 labour-units, and Q1 > Q2 for L > 16 labour-units. (2 Marks) Ace Dry Cleaning, Inc. currently employs 26 labour-days per day in its pants division, along with its fixed plant and equipment. Pants are dry-cleaned using one of two processes: Process 1, which is characterized by the average product of labour (APL) equation (APL)1 = 40 - L1 , and Process 2, with equation (APL)2 = 30 - 0.5L2. Give the equations for MPL for each process.

Ans: TPL1=40L-L2 (MPL)1 = 40 - 2L1 TPL2=30L-0.5L2 (MPL)2 = 30 - L2.

Name: _____________________________ Student #: __________________ Lab Section: B04 / B05/ B06 Lab Quiz #3: Econ 203

October 15, 2013

1. If equal increments of a variable input are combined with a fixed input, A) the increments to output will eventually increase. B) the additions to output will be constant. C) total cost will eventually decrease. D) output will eventually increase at a decreasing rate. 2. The marginal product of a variable input is A) zero at the point of diminishing returns. B) the change in average product that occurs when the variable input is increased by one unit. C) the change in the total product that occurs in response to a unit change in the variable input. D) the second derivative of the total product function. E) more than one of the above. 3. The average product of a variable input A) decreases at an increasing rate. B) is the sum of the individual marginal cost curves. C) is the change in the total product that occurs when the variable input increases by one unit. D) is the total product divided by the quantity of the variable input. E) necessarily increases initially and subsequently diminishes. 4. (3 marks) SuperBlast Cola (the soft drink with 10 times the regular amount of caffeine, for those all-night study-thons!) can be produced using either of two production processes: Q1 = LK1/2 or Q2 = L3/4 K3/4. a. For each production process, state whether it is characterized by constant, increasing, or decreasing returns to scale, and whether it displays constant, increasing, or diminishing marginal productivity of labour and of capital. b. Calculate Q1 and Q2 when L = K = 1 and when L = K = 16. c. Give the formulas for Q1 and Q2 as functions of L when K = 16, and then calculate the formulas for MPL in each case. For what values of L is Q1 < Q2? For what values of L is Q1 = Q2? For what values of L is Q1 > Q2? 5. (2 Marks) Ace Dry Cleaning, Inc. currently employs 26 labour-days per day in its pants division, along with its fixed plant and equipment. Pants are dry-cleaned using one of two processes: Process 1, which is characterized by the average product of labour (APL) equation (APL)1 = 40 - L1 , and Process 2, with equation (APL)2 = 30 - 0.5L2. Give the equations for MPL for each process.