Economics

Salvatore’s Chapter 7

Discussion Questions

3. (a) How is the law of diminishing returns reflected in the shape of the total product curve? (b) What is the relationship between diminishing returns and the stages of production?

11. Minimum wage legislation requires most firms to pay workers no less than the legislated minimum wage per hour. Using marginal productivity theory, explain how a change in the minimum wage affects the employment of unskilled labor.

12. It is always better to hire a more qualified and productive worker than a less qualified and productive one regardless of cost. True or false? Explain.

Problems

4. Ms. Smith, the owner and manager of the Clear Duplicating Service located near a major university, is contemplating keeping her shop open after 4 p. m. and until midnight. In order to do so, she would have to hire additional workers. She estimates that the additional workers would generate the following total output (where each unit of output refers to 100 pages duplicated). If the price of each unit of output is $ 10 and each worker hired must be paid $ 40 per day, how many workers should Ms. Smith hire? (Ms. Smith should hire workers as long as their marginal revenue product (MRP) exceeds their marginal resource cost (MRC)and until MRP=MRC.

MRP=MR x MP = P x MP = $10 x MP (use information in the problem to calculate MP)

MRC=wages=$40

Workers hired	0	1	2	3	4	5	6
Total product	0	12	22	30	36	40	42

12. Suppose that the production function for a commodity is given by

Q = 10 √LK

where Q is the quantity of output, L is the quantity of labor, and K is the quantity of capital. (a) Indicate whether this production function exhibits constant, increasing, or decreasing returns to scale. (b) Does the production function exhibit diminishing returns? If so, when does the law of diminishing returns begin to operate? Could we ever get negative returns? (P12(a) Calculate Q when L=1 and K=, and L=2 and K=2. Then compare and answer the question about the returns to scale). (P12(b) Given K=1, show the change in Q if L changes from 1 to 2 and 2 to 3. Answer the question about diminishing returns)

13. Indicate whether each of the following statements is true or false and give the reason. (a) A firm should stop expanding output after reaching diminishing returns and (b) if large and small firms operate in the same industry, we must have constant returns to scale. (P13(a) See figure (7-4) on page 276)

References

TimeCPI3-month MAFA-F(A-F)^26-month MAFA-F(A-F)^2

Jan-98161.0

Feb-98161.1

Mar-98161.4

Apr-98161.8

May-98162.3

Jun-98162.2

Jul-98162.1

Aug-98162.6

Sep-98162.6

Oct-98163.2

Nov-98163.4

Dec-98163.5

Jan-99164.2

Feb-99164.6

Mar-99165.0

Apr-99166.6

May-99166.2

Jun-99165.4

Jul-99165.8

Aug-99166.3

Sep-99167.2

Oct-99167.2

Nov-99167.1

Dec-99167.3

Jan-00167.9167.20.70.49

Feb-00169.3167.41.93.48

Mar-00170.7168.22.56.42

Apr-00170.6169.31.31.69

May-00171.1170.20.90.81

Jun-00171.0170.80.20.04

Jul-00171.7170.90.80.64

Aug-00172.2171.30.90.87

Sep-00173.3171.61.72.78

Oct-00173.8172.41.41.96

Nov-00173.5173.10.40.16

Dec-00173.5173.50.00.00

Salvatore's Chapter 6 Appendix Problem 1 (p.256)

TimeCPIForecast(w=0.3)(A-F)^2Forecast(w=0.7)(A-F)^2

35796161.0166.63166.63

35827161.1164.94

35855161.4163.79

35886161.8163.07

35916162.3162.69

35947162.2162.57

35977162.1162.46

36008162.6162.35

36039162.6162.43

36069163.2162.48

36100163.4162.70

36130163.5162.91

36161164.2163.08

36192164.6163.42

36220165163.77

36251166.6164.14

36281166.2164.88

36312165.4165.28

36342165.8165.31

36373166.3165.46

36404167.2165.71

36434167.2166.16

36465167.1166.47

36495167.3166.66

36526167.9166.851.10

36557169.3167.174.55

36586170.7167.818.37

36617170.6168.673.71

36647171.1169.253.41

Salvatore's Chapter 6 Appendix Problem #3 (p.257)