Chapter 6 - This is the html version of the file

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This is the html version of the file http://www.ses.wsu.edu/People/faculty/rosenman/econs404/keat_ans/ch06_keat5e.doc . Google automatically generates html versions of documents as we crawl the web. Chapter 6 AND APPENDIcES THE THEORY AND ESTIMATION OF PRODUCTION Questions 1. The short run production function contains at least one fixed input. In the long run production function, there are no fixed inputs, all inputs are variable. In a manufacturing company, a short run production function involves the increase in labor inputs (e.g., working three shifts instead of two) or materials. If the firm expands its factory, or builds a new one, it would be considered an example of its long run production function. 2. The law of diminishing returns: As additional units of variable input are added to a fixed input, at some point the additional output (marginal product) resulting from this addition starts to diminish. Another way to consider this law is to recognize that when it takes effect, a firm has to add increasingly more of the variable input in order to increase the additional output by a constant amount. Note that this is because the fixed input is essentially becoming scarce relative to the variable input. This law is considered a short - run phenomenon in economic theory because it requires at least one of the inputs used by the firm to be held constant. 3. Stage I ends and Stage II begins at the point of maximum AP. Stage II ends and Stage III begins at the point of maximum output (i.e., when MP = 0). The law of diminishing returns occurs just before Stage I ends. As the MP starts to diminish it intersects AP at AP’s highest value. 4. Adhering to the MRP=MLC (or MRP=MFC) rule is an example of equalizing at the margin. As long as the benefit of using an additional unit of input (i.e., MRP) is greater than its cost (i.e., MLC), it pays for the firm to employ an extra unit. Once MLC exceeds MRP, it no longer pays for the firm to do so if it wants to maximize its profits/benefits. At the margin, the firm will stop adding inputs at the point where the additional benefit (MRP) is just equal to the additional cost (MLC).
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5. Returns to scale is a measure of the increase in a firm’s output relative to a proportionate increase in all of its inputs. It is considered a long- run phenomenon in economic theory because all inputs are allowed to change. 6. Perhaps the firm is not following the rule at first. However, after completing the program, the trainee is expected to increase his or her productivity sufficiently to exceed the costs associated with the hiring and training. 7. If marginal product is greater than average product, average product increases. If it is less than average product, average product decreases. If it is equal to average product, then average product is either at a maximum or a minimum. In the short - run production function, since marginal product starts off as greater than average product and then falls below average product, we can assume that at
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This note was uploaded on 04/25/2010 for the course ECON econ302 taught by Professor Rahman during the Spring '10 term at Fairmont State.

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Chapter 6 - This is the html version of the file

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