Professional Documents
Culture Documents
1. You are given the following production functions. What types of production
function they are?
(i) Q=2L+K
(ii) Q=min(2L,K)
Solution:
Q = L0.75 K0.25
Solution:
Substituting the values of MPL and MPk obtained from the given production
function the above section (i)
Q = 0.75(K/L)0.25 L +0.25(K/L)0.75 K
Q = L0.75 K0.25
Q=Q
1. Suppose that a product requires two inputs for its production. Then is it correct to
say that if the prices of the two inputs are equal, optimal behaviour on the part of
the producer requires that these inputs be used in equal amounts?
Solution:
It is not correct to say that if the prices of the two inputs are equal, then these inputs should be
used in equal amounts except in one case. We may explain as follows. Let us suppose that the
production function of the firm is
We may conclude, therefore, that the given statement is true, i.e., the firm should use the two
inputs (with equal prices) in equal amounts if the production function of the firm gives rise to
rectangular hyperbola isoquants, Otherwise the given statement is not correct.
2. A firm use two inputs X and Y for producing its output. The production function of
the firm is q = f (x, y) = xy, and the market prices of the two inputs are given to be
Rs 20 and Rs 10, respectively. Find the input combination the firm should use to
obtain the maximum possible output with the help of an expenditure of Rs 2,000,
and also find what would be the maximum possible output.
Solution:
C° = rX x + rY y
or, 2,000 = 20x + 10y ………..(2)
Here the relevant Lagrange function for obtaining the required input combination is
Therefore, the FOCs give us that the firm would have to use the input combination (x = 50 units,
y = 100 units) in order to produce the maximum possible output, and putting the values of x and
y in the production function (1), we obtain the maximum possible amount of output to be q = 50
x 100 = 5,000 (units) we may also verify the second-order condition given by
Solution:
Therefore, the SOC is satisfied, and so, the output-maximising quantities of the inputs are
Comments:
In order to obtain the maximum output we might as well integrate the MP K function over the
interval 0 and 101.
Although in both cases (of integration of the MP L function and that of the MP« function), the
(maximum) output quantity would be obtained at L = 247.5 and K = 101, the results would be
different (may be by a relatively small extent) because in the first case labour is treated as a
variable input and capital as a fixed input and in the second case capital is treated as a variable
input and labour as a fixed input.
Returns to Scale:
1. Given the production function Q=f(x1,x2)=x1^2.x2^3 where x1,x2 are two inputs
and Q is production.Does this show constant, decreasing or increasing returns to
scale?
Solution:
Q= x1^2.x2^3
Increasing both inputs x1 and x2 by m, we get
Q’= (mx1)^2.(mx2)^3= m^5.x1^2.x2^3= m^5Q
Thus increase in both inputs by m causes output to increase by m^5.Hence, increasing returns
to scale prevail in this case. In Cobb-Douglas equation, if sum of exponents is greater than
one, increasing returns to scale.
2. Consider production function Q=5L^0.5K^0.3.Does it represent
increasing,decreasing or constant returns to scale?
Solution:
Increasing both labour and capital inputs by m,we have:
Q’=5(mL)^0.5.(mK)^0.3
Q’=m^0.8Q
That is, by increasing labour and capital by m, output increases by m^0.8, that is less than m.
Thus, in this case decreasing returns to scale occurs.
3. Suppose a commodity is produced with two inputs, labour and capital, and the
production function is given by
Q=10*sqrt(L*K)
Where Q is the output and L and K are amounts of labour and capital. What type of
returns to scale does it exhibit?
Solution:
The above production function can be rewritten as
Q= 10L^0.5*K^0.5
Hence, this a Cobb-Douglas production function. To show the nature of return to scale, let us
multiply L and K by p
Q’= 10(pL)^0.5(pK)^0.5=pQ
Increasing L and K by p results in increase in output(Q) by p. Hence, this shows constant returns
to scale.