microeconomics final exam help

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VI. Production

A. Definition-process of converting inputs to outputs 1. Inputs-land (raw materials), labor, capital

2. Output-whatever the firm produces

B. Firm’s decisions 1. Determine how much should be produced-depends on

a) Price of output

b) Costs of production

2. Select the technology (production function) to use

3. Determine the amount of inputs

4. These are not really independent decisions but made together.

a) In this part assume the firm selects output level

b) Our focus on technology and inputs

c) Firm seeks to minimize costs for a given level of output

C. Production function 1. Mathematical relation showing how inputs converted to output. 𝑞 = 𝑓(𝑘,𝑙), which just tells us that output, q, depends on the firm’s capital (k) and labor (l).

2. Assumptions about production function

a) More k or more l means more q. More inputs means more output

b) As additional units of capital are added to a fixed amount of labor the increments to output get smaller. Diminishing marginal product of capital

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c) As additional units of labor are added to a fixed amount of capita; the increments to output get smaller. Diminishing marginal product of labor. Draw graph

3. Marginal Product of Labor Example-Price of good is 2 KD-

a) Value of the MPL is the price of what is produced times MPL. This represents the amount added to revenue by the additional worker.

b) Suppose wage rate is KWD 15

Labor Output Average product of labor Marginal product of labor

Value of marginal product of labor

0 0 -- --

1 40 40 40 80 KD

2 70 35 30 60

3 90 30 20 40

4 100 25 10 20

5 105 21 5 10

c) Should the 1st worker be hired? Yes, value of what each produces (the value of the MPL) exceeds the wage.

d) Should the 2ndworker be hired?

e) Should the 5th worker be hired? No, the 5th worker produces goods worth 10 KWD but costs 15 KWD.

4. Short run production function-in short run one input, capital, is fixed and the other factor, labor, is variable.

5. Long run production function-all inputs are variable

6. Long run example-suppose there are five different technologies for producing 100 pizzas, these are shown in the table below.

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Technology Capital Labor A 2 9 B 3 8 C 4 4 D 6 3 E 10 2

a) What is the best combination (lowest cost) for producing 100 pizzas? Don’t know without information on prices of labor and capital.

Technology Capital Labor PK=10, PL=7 PK=10, PL=1 A 2 9 83 29 B 3 8 86 38 C 4 4 68 44 D 6 3 81 63 E 10 2 114 102

b) If the price of labor is low (last column) use technology that uses little capital and much labor. Option A, lowest cost of the 5 technologies given labor price of 1 and capital price of 10.

c) If the price of labor is KWD 7 then the lowest cost technology is C.