Professional Documents
Culture Documents
• Firms eliminate the need for every worker to negotiate every task that he
or she will perform, and bargain over the fees that will be paid for those
tasks.
‐ Firms can avoid this kind of bargaining by having managers that direct the production of
salaried workers—they tell workers what to do and when to do it, and the workers (as well
as the managers themselves) are simply paid a weekly or monthly salary.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
6.1 THE TECHNOLOGY OF PRODUCTION
•In general, the average product of labor is given by the slope of the line drawn from
the origin to the corresponding point on the total product curve.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
6.2 PRODUCTION WITH ONE VARIABLE INPUT (LABOR)
Figure 6.2
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
•EXAMPLE 6.2 •MALTHUS AND THE FOOD CRISIS
• Figure 6.4
•CEREAL YIELDS AND THE WORLD PRICE OF FOOD
•Cereal yields have increased. The average world price of food increased temporarily
in the early 1970s but has declined since.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
6.2 PRODUCTION WITH ONE VARIABLE INPUT (LABOR)
•Labor Productivity
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
3. Fill in the gaps in the table below.
0 0 – –
1 225
2 300
3 300
4 1140
5 225
6 225
3. Fill in the gaps in the table below.
ANS
Quantity of Total Marginal Product Average Product
Variable Input Output of Variable Input of Variable Input
0 0 ___ ___
1 225 225 225
2 600 375 300
3 900 300 300
4 1140 240 285
5 1365 225 273
6 1350 –15 225
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
2. Suppose a chair manufacturer is producing in the short run (with its
existing plant and equipment). The manufacturer has observed the following
levels of production corresponding to different numbers of workers:
a) Calculate the marginal and average product of labor for this production function.
b) Does this production function exhibit diminishing returns to labor? Explain.
c) Explain intuitively what might cause the marginal product of labor to become
negative.
•Chapter 6 Production . Chairat Aemkulwat . Economics I: 2900111
2.
a) Calculate the marginal and average product of labor for this production function.
q L q APL MPL
ANS The average product of labor, APL, is equal to L . q 0 0 __ __
The marginal product of labor, MPL, is equal to L , 1 10 10 10
2 18 9 8
the change in output divided by the change in labor 3 24 8 6
input. For this production process we have: 4 28 7 4
5 30 6 2
c) Explain intuitively what might cause the marginal product of labor to become
negative.
ANS Labor’s negative marginal product for L > 5 may arise from congestion in the chair
manufacturer’s factory. Since more laborers are using the same fixed amount of capital,
it is possible that they could get in each other’s way, decreasing efficiency and the
amount of output. Firms also have to control the quality of their output, and the high
congestion of labor may produce products that are not of a high enough quality to be
offered for sale, which can contribute to a negative marginal product.
6.3 PRODUCTION WITH TWO VARIABLE INPUTS
•22
6.3 PRODUCTION WITH TWO VARIABLE INPUTS
• Isoquants
● isoquant map Graph combining a number of
isoquants, used to describe a production function.
Figure 6.4
Production with Two Variable Inputs
(continued)
Figure 6.4
Production with Two Variable Inputs
(continued)
Diminishing Marginal Returns
Holding the amount of capital
fixed at a particular level—say 3,
we can see that each additional
unit of labor generates less and
less additional output.
Figure 6.6
Isoquants When Inputs Are
Perfect Substitutes
•The exact labor/capital combination to use depends on input prices, a subject that we
discuss in Chapter 7.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
•EXAMPLE 6.4 •A PRODUCTION FUNCTION FOR WHEAT
• Figure 6.9
•ISOQUANT DESCRIBING THE
PRODUCTION OF WHEAT
A wheat output of 13,800
bushels per year can be
produced with different
combinations of labor and
capital.
The more capital-intensive
production process is shown
as point A,
the more labor- intensive
process as point B.
The marginal rate of technical
substitution between A and B
is 10/260 = 0.04.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
5. For each of the following examples, draw a representative
isoquant. What can you say about the marginal rate of
technical substitution in each case?
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
a) A firm can hire only full-time employees to produce its output, or it can hire some combination of full-time
and part-time employees. For each full-time worker let go, the firm must hire an increasing number of
temporary employees to maintain the same level of output.
ANS Place part-time workers on the vertical axis and full-time workers on the
horizontal. The slope of the isoquant measures the number of part-time
Part-time
b) A firm finds that it can always trade two units of labor for one unit of capital and still keep output constant.
ANS The marginal rate of technical substitution measures the number of units of capital that can
be exchanged for a unit of labor while still maintaining output. If the firm can always trade
two units of labor for one unit of capital then the MRTS of labor for capital is constant and
equal to 1/2, and the isoquant is linear.
c) A firm requires exactly two full-time workers to operate each piece of machinery in the factory
ANS This firm operates under a fixed proportions technology, and the isoquants are L-shaped. The
firm cannot substitute any labor for capital and still maintain output because it must maintain
a fixed 2:1 ratio of labor to capital. The MRTS is infinite (or undefined) along the vertical
part of the isoquant and zero on the horizontal part.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
6. A firm has a production process in which the
inputs to production are perfectly substitutable
in the long run. Can you tell whether the
marginal rate of technical substitution is high or
low, or is further information necessary?
Discuss.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
6.4 RETURNS TO SCALE
Returns to Scale
When a firm’s production process exhibits However, when there are increasing
constant returns to scale as shown by a returns to scale as shown in (b), the
movement along line 0A in part (a), the isoquants move closer together as
isoquants are equally spaced as output inputs are increased along the line.
increases proportionally.
•In Figure 6.10 (a), the firm’s production function exhibits constant returns. Twice as
much of both inputs is needed to produce 20 units, and three times as much is
needed to produce 30 units.
•In Figure 6.10 (b), the firm’s production function exhibits increasing returns to scale.
Less than twice the amount of both inputs is needed to increase production from 10
units to 20; substantially less than three times the inputs are needed to produce 30
units.
•Returns to scale vary considerably across firms and industries. Other things being
equal, the greater the returns to scale, the larger the firms in an industry are likely to
be.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
•EXAMPLE 6.5 •RETURNS TO SCALE IN THE CARPET INDUSTRY
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
9. The production function for the personal computers
of DISK, Inc., is given by
q = 10K0.5L0.5,
where q is the number of computers produced per day, K
is hours of machine time, and L is hours of labor input.
DISK’s competitor, FLOPPY, Inc., is using the production
function q = 10K0.6L0.4.
b) Assume that capital is limited to 9 machine hours, but labor is unlimited in supply.
In which company is the marginal product of labor greater? Explain.
ANS With capital limited to 9 machine hours, the
production functions become q1 = 30L0.5 and L
q
Firm 1
MPL
Firm 1
q
Firm 2
MPL
Firm 2
q2 = 37.37L0.4. To determine the production 0 0.0 — 0.00 —
function with the highest marginal productivity of 1 30.00 30.00 37.37 37.37
labor, consider the following table: 2 42.43 12.43 49.31 11.94
3 51.96 9.53 57.99 8.68
For each unit of labor above 1, the marginal 4 60.00 8.04 65.06 7.07
productivity of labor is greater for the first firm,
DISK, Inc.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
Recap CHAPTER 6
• Returns to Scale