Chapter 6: Production

CHAPTER 6
PRODUCTION

EXERCISES
1. The menu at Joe’s coffee shop consists of a variety of coffee drinks, pastries,
and sandwiches. The marginal product of an additional worker can be defined as
the number of customers that can be served by that worker in a given time
period. Joe has been employing one worker, but is considering hiring a second
and a third. Explain why the marginal product of the second and third workers
might be higher than the first. Why might you expect the marginal product of
additional workers to eventually diminish?
The marginal product could well increase for the second and third workers,
since each of the first 2 or 3 workers would be able to specialize in a different
task. If there is only 1 worker, then that worker will have to take orders and
prepare all the food. Eventually, however, the marginal product would
diminish because there would be too many people behind the counter trying
to accomplish a limited number of tasks.
2. Suppose a chair manufacturer is producing in the short run (with its existing
plant and equipment). The manufacturer has observed the following levels of
production corresponding to different numbers of workers:
Number of chairs Number of workers
1 10
2 18
3 24
4 28
5 30
6 28
7 25

a. Calculate the marginal and average product of labor for this production
function.
Q
The average product of labor, APL, is equal to . The marginal product of
L
Q
labor, MPL, is equal to , the change in output divided by the change in labor
L
input. For this production process we have:
L Q APL MPL

0 0 __ __
1 10 10 10
2 18 9 8
3 24 8 6

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4 28 7 4
5 30 6 2
6 28 4.7 -2
7 25 3.6 -3
b. Does this production function exhibit diminishing returns to labor? Explain.
This production process exhibits diminishing returns to labor. The marginal
product of labor, the extra output produced by each additional worker,
diminishes as workers are added, and is actually negative for the sixth and
seventh workers.
c. Explain intuitively what might cause the marginal product of labor to become
negative.
Labor’s negative marginal product for L > 5 may arise from congestion in the
chair manufacturer’s factory. Since more laborers are using the same, fixed
amount of capital, it is possible that they could get in each other’s way,
decreasing efficiency and the amount of output. Many firms also have to
control the quality of output and the high congestion of labor may produce
output that is not of a high enough quality to be offered for sale, which can
contribute to a negative marginal product.
3. 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 0 ___ ___
1 225
2 300
3 300
4 1140
5 225
6 225

Quantity of Total Marginal Product Average Product

Variable Input Output of Variable Input of Variable Input

0 0 ___ ___
1 225 225 225
2 600 375 300
3 900 300 300
4 1140 240 285
5 1365 225 273
6 1350 -15 225

4. A political campaign manager has to decide whether to emphasize television

advertisements or letters to potential voters in a reelection campaign. Describe
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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.
5. For each of the following examples, draw a representative isoquant. What can
you say about the marginal rate of technical substitution in each case?
a. A firm can hire only full-time employees to produce its output, or it can hire
some combination of full-time and part-time employees. For each full-time
worker let go, the firm must hire an increasing number of temporary
employees to maintain the same level of output.
Place part time workers on the vertical axis and full time workers on the
horizontal axis. The slope of the isoquant measures the number of part time
workers that can be exchanged for a full time worker, while still maintaining
output. When we are at the bottom end of the isoquant we have a lot of full
time workers and few part time workers. As we move up the isoquant and
give up full time workers, we must hire more and more part time workers to
replace each full time worker. The slope increases (in absolute value terms)
as we move up the isoquant. The isoquant is therefore convex and we have
diminishing marginal rate of technical substitution.
b. A firm finds they it can always trade two units of labor for one unit of
capital and still keep output constant.
The marginal rate of technical substitution measures the number of units of
labor that can be exchanged for a unit of capital while still maintaining output.
If the firm can always trade two labor for one capital then the MRTS is
constant and the isoquant is linear.
c. A firm requires exactly two full-time workers to operate each piece of
machinery in the factory.
This firm operates under a fixed proportions technology, and the isoquants
are L-shaped. The firm cannot exchange any labor for capital and still
maintain output because it must maintain a fixed 2:1 ratio of labor:capital.

6. 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. In this case,
we do not know whether the MRTS is high or low. All we know is that it is a
constant number. We need to know the marginal product of each input to
determine the MRTS.
7. 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?

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The marginal rate of technical substitution is defined at the ratio of the two
marginal products. 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 50 1
 MRTS, or  , or
MPK MPK 4
MPK = 200 computer chips per hour.
8. Do the following functions exhibit increasing, constant, or decreasing returns
to scale? What happens to the marginal product of each individual factor as that
factor is increased, and the other factor is held constant?
a.
This function exhibits constant returns to scale. For example, if L is 2 and K is
2 then q is 10. If L is 4 and K is 4 then q is 20. When the inputs are doubled,
output will double. Each marginal product is constant for this production
function. When L increases by 1 q will increase by 3. When K increases by 1
q will increase by 2.

b.
This function exhibits decreasing returns to scale. For example, if L is 2 and K
is 2 then q is 2.8. If L is 4 and K is 4 then q is 4. When the inputs are doubled,
output will less than double. The marginal product of each input is
decreasing. This can be determined using calculus by differentiating the
production function with respect to either input, while holding the other input
constant. For example, the marginal product of labor is

Since L is in the denominator, as L gets bigger, the marginal product gets

smaller. If you do not know calculus, then you can choose several values for
L, find q (for some fixed value of K), and then find the marginal product. For
example, if L=4 and K=4 then q=4. If L=5 and K=4 then q=4.24. If L=6 and
K=4 then q= 4.47. Marginal product of labor falls from 0.24 to 0.23.

c.
This function exhibits increasing returns to scale. For example, if L is 2 and K
is 2 then q is 24. If L is 4 and K is 4 then q is 192. When the inputs are
doubled, output will more than double. Notice also that if we increase each
input by the same factor then we get the following:
.
Since is raised to a power greater than 1, we have increasing returns to
scale.
The marginal product of labor is constant and the marginal product of capital
is increasing. For any given value of K, when L is increased by 1 unit, q will go
up by units, which is a constant number. Using calculus, the marginal
product of capital is MPK=2*3*L*K. As K increases, MPK will increase. If you
do not know calculus then you can fix the value of L, choose a starting value
for K, and find q. Now increase K by 1 unit and find the new q. Do this a few
more times and you can calculate marginal product. This was done in part b
above, and is done in part d below.

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d.
This function exhibits constant returns to scale. For example, if L is 2 and K is
2 then q is 2. If L is 4 and K is 4 then q is 4. When the inputs are doubled,
output will exactly double. Notice also that if we increase each input by the
same factor then we get the following:

Since is raised to the power 1, we have constant returns to scale.

The marginal product of labor is decreasing and the marginal product of
capital is decreasing. Using calculus, the marginal product of capital is
1

L2
MPK = 1
.
2K 2

For any given value of L, as K increases, MPK will increase. If you do not know
calculus then you can fix the value of L, choose a starting value for K, and find
q. Let L=4 for example. If K is 4 then q is 4, if K is 5 then q is 4.47, and if K is
6 then q is 4.89. The marginal product of the 5 th unit of K is 4.47-4=0.47, and
the marginal product of the 6th unit of K is 4.89-4.47=0.42. Hence we have
diminishing marginal product of capital. You can do the same thing for the
marginal product of labor.

e.
This function exhibits decreasing returns to scale. For example, if L is 2 and K
is 2 then q is 13.66. If L is 4 and K is 4 then q is 24. When the inputs are
doubled, output will less than double.
The marginal product of labor is decreasing and the marginal product of
capital is constant. For any given value of L, when K is increased by 1 unit, q
will go up by 4 units, which is a constant number. To see that the marginal
product of labor is decreasing, fix K=1 and choose values for L. If L=1 then
q=8, if L=2 then q=9.65, and if L=3 then q=10.93. The marginal product of
the second unit of labor is 9.65-8=1.65 and the marginal product of the third
unit of labor is 10.93-9.65=1.28. Marginal product of labor is diminishing.
9. 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. DISK’s competitor, FLOPPY, Inc., is
using the production function q = 10K0.6L0.4.
a. 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.
Note that if the two firms both used the same amount of capital and the same
amount of labor, but the amount of capital was not equal to the amount of
labor, then the two firms would not produce the same level of output. In fact, if
K>L then q2>q.
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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 = 37.372L0.4. To determine the production function with the highest
marginal productivity of labor, consider the following table:

L q MPL q MPL
Firm 1 Firm 1 Firm 2 Firm 2

0 0.0 ___ 0.00 ___

1 30.00 30.00 37.37 37.37
2 42.43 12.43 49.31 11.94
3 51.96 9.53 58.00 8.69
4 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.
10. In Example 6.3, wheat is produced according to the production function
q = 100K0.8L0.2.
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 ) = 660.22
K = 5  q = (100)(50.8 )(490.2 ) = 789.25  MPK = 129.03
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:
L = 49  q = (100)(40.8 )(490.2 ) = 660.22
L = 50  q = (100)(40.8 )(500.2 ) = 662.89  MPL = 2.67
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 () 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.

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