Practice questions

Use the production function

Q = 10K0.5L0.6
to complete the following production table
Q = 10*(K^0.5)*(L^0.6)
6 24.5 37.1 47.4 56.3 64.3 71.8
Rate of Capital

5 22.4 33.9 43.2 51.4 58.7 65.5

Input (K)

4 20.0 30.3 38.7 45.9 52.5 58.6

3 17.3 26.3 33.5 39.8 45.5 50.8
2 14.1 21.4 27.3 32.5 37.1 41.4
1 10.0 15.2 19.3 23.0 26.3 29.3
1 2 3 4 5 6
Rate of Lanbor Input (L)

Use the data from the above table to answer the following questions

(a) If the rate of capital input is fixed at three and if output sells for Rs.5 per unit, determine the total,
average and marginal product functions and the marginal revenue product functions for labor in the
following table
L TP(L) AP(L) MP(L) MRP(L)
0        
1        
2        
3        
4        
5        
6        
(b) Using the data from part (a), if the wage rate is Rs.28 per unit, how much labor should be employed?

(c) If the rate of labor is fixed at 5 and the price of output is Rs.5 per unit, determine the total, average
and marginal product functions for capital and the marginal revenue product of capital in the
following table
K TP(K) AP(K) MP(K) MRP(K)
0        
1        
2        
3        
4        
5        
6        
(d) Using the data from part (c), if the wage rate is Rs.28 per unit, how much labor should be employed?

Question
For each of the following production functions, determine whether returns to scale are
decreasing, constant, or increasing.
Q = 2K + 3L + KL
Q = 20K0.6L0.5
Q = 100 + 3K + 2L
Q = 5KαLβ, where α + β = 1
Q = 10KaLb, where a + b = 1.2
Q = K/L

Question 1:
The production function for global electronics is

Q=2 K 0.5 L0.5

Assume that the capital stock is fixed at nine units (i.e., K = 9). If the price of output (P) is
Rs.6 per unit and the wage rate (w) is Rs.2 per unit, determine the optimal or profit
maximizing rate of labor to be hired. What labor rate is optimal if the wage rate increased
to Rs.3 per unit?

Question 2:
A production process uses only one input, labor, and is described by the following
production function:
2 L3
Q=25 L −
3

(NOTE: this function is applicable only for labor input rates between 0 and 75.) Over what
output ranges are marginal returns increasing, decreasing (but still positive), and negative?

Question 3:
Guwahati Tyres, a small producer of automobile tyres, has the following production
function.

Q=100 K 0.5 L0.5

During the last production period, the firm operated efficiently and used input rates of 100
and 25 for capital and labor, respectively.
a) What is the marginal product of capital and the marginal product of labor based on the
input rates specified?
b) If the price of capital was Rs.20 per unit, what was the wage rate?
c) For the next production period, the price per unit of capital is expected to increase to
Rs.25, while the wage rate and the labor input will remain unchanged under the terms
of labor contract with the labor union. If the firm maintains efficient production, what
input rate of capital will be used?

Question
Given the production function
Q = 30K0.7L0.5

and input prices r = 20 and w = 30

a) Determine the equation for the expansion path
b) What is the efficient input combination for an output rate of Q = 200? For Q = 500?

Question
The production function of Baroda Foods Limited is
Q = 20K0.5L0.5
The initial prices of inputs are w = 20 and r = 30. Under the labor contract with a national
union, at least the current employment level of 300 workers must be maintained through
the next production period. (However, more workers can be hired if necessary.)
a) In the previous production period, the firm produced 4,899 units of output. Assuming
efficient production, what was the rate of capital input?
b) Because of the national recession, the desired level of output for the next production
period is only 4,000 units. What is the optimal rate of capital input?