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Economics Notes

The document covers key concepts in economics related to optimal factor combinations, economies and diseconomies of scale, returns to scale, and marginal productivity of labor and capital. It provides problems and solutions illustrating how to determine optimal input ratios, analyze cost functions, and calculate productivity measures. The findings indicate that the firm uses an optimal factor combination, experiences both economies and diseconomies of scale, has constant returns to scale, and provides formulas for calculating marginal productivity.

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neha bhatia
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2 views2 pages

Economics Notes

The document covers key concepts in economics related to optimal factor combinations, economies and diseconomies of scale, returns to scale, and marginal productivity of labor and capital. It provides problems and solutions illustrating how to determine optimal input ratios, analyze cost functions, and calculate productivity measures. The findings indicate that the firm uses an optimal factor combination, experiences both economies and diseconomies of scale, has constant returns to scale, and provides formulas for calculating marginal productivity.

Uploaded by

neha bhatia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Economics Notes & Numericals

1. Optimal Factor Combination


Problem: A firm uses labor (L) and capital (K) to produce output. The price of labor (w) is Rs. 200
per unit, and the price of capital (r) is Rs. 500 per unit. The marginal product of labor (MPL) is 20,
and the marginal product of capital (MPK) is 50. Find the optimal factor combination.
Solution: The firm minimizes cost by using inputs in a ratio where:
MPL/MPK = w/r
20/50 = 200/500
0.4 = 0.4
Since both sides are equal, the firm is already using an optimal factor combination.

2. Economies and Diseconomies of Scale


Problem: A firm's total cost function is given by: TC = 500 + 20Q + 2Q^2. Find the long-run average
cost (LAC) and determine if the firm experiences economies or diseconomies of scale.
Solution: LAC = (TC / Q) = (500 + 20Q + 2Q^2) / Q
LAC = 500/Q + 20 + 2Q
For small Q, LAC falls (economies of scale). For large Q, LAC rises (diseconomies of scale).

3. Returns to Scale
Problem: A firm's production function is Q = L^0.6 K^0.4. Determine whether the firm experiences
increasing, constant, or decreasing returns to scale.
Solution: Sum of exponents = 0.6 + 0.4 = 1.
- If sum > 1 -> Increasing returns to scale
- If sum = 1 -> Constant returns to scale
- If sum < 1 -> Decreasing returns to scale
Since the sum is 1, the firm experiences constant returns to scale.

4. Marginal Productivity of Labor (MPL) and Capital (MPK)


Problem: Given the production function Q = 5L^0.5 K^0.5, find MPL and MPK.
Solution:
MPL = dQ/dL = 5 * 0.5 * L^(-0.5) * K^0.5 = (2.5 K^0.5) / L^0.5
MPK = dQ/dK = 5 * 0.5 * L^0.5 * K^(-0.5) = (2.5 L^0.5) / K^0.5
These values show how output changes with labor or capital variations.

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