Practice problem set 4

Managerial Economics
PGP, 2020-2022

1) A farmer uses L units of labor and K units of capital to produce Q units of corn using a
production function F(K,L). A production plan that uses K' = L' = 10 to produce Q' units of
corn where
Q' < F(10, 10) is said to be
A) technically feasible and efficient.
B) technically unfeasible and efficient.
C) technically feasible and inefficient.
D) technically unfeasible and inefficient.
E) none of the above
Answer: C
Section: 6.1

2) Which of the following equations based on capital (K) and labor (L) inputs does not
represent a plausible production function?
A) F(K,L) = 3KL
B) F(K,L) = 3K
C) F(K,L) = K + L - 1
D) F(K,L) = 10(KL)0.5
Answer: C
Section: 6.1

Figure 6.1

3) Refer to Figure 6.1. At point A, the marginal product of labor is

A) rising.
B) at its minimum.
C) at its maximum.
D) diminishing.
Answer: A
Section: 6.2

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4) Refer to Figure 6.1. At which point on the total product curve is the average product of
labor the highest?
A) point A.
B) point B.
C) point C.
D) point D.
E) none of the above
Answer: B
Section: 6.2

5) A firm uses two factors of production. Irrespective of how much of each factor is used,
both factors always have positive marginal products which imply that
A) isoquants are relevant only in the long run
B) isoquants have negative slope
C) isoquants are convex
D) isoquants can become vertical or horizontal
E) none of the above
Answer: B
Section: 6.3

Figure 6.2

6) Refer to Figure 6.2. The situation pictured is one of

A) constant returns to scale, because the line through the origin is linear.
B) decreasing returns to scale, because the isoquants are convex.
C) decreasing returns to scale, because doubling inputs results in less than double the
amount of output.
D) increasing returns to scale, because the isoquants are convex.
E) increasing returns to scale, because doubling inputs results in more than double the
amount of output.
Answer: E

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Section: 6.4

7) The situation pictured in Figure 6.2

A) is one of increasing marginal returns to labor.
B) is one of increasing marginal returns to capital.
C) is consistent with diminishing marginal product.
D) contradicts the law of diminishing marginal product.
E) shows decreasing returns to scale.
Answer: C
Section: 6.4

8) A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with
the following production function C = L0.5M0.75. This production function exhibits
A) decreasing returns to scale for all output levels
B) constant returns to scale for all output levels
C) increasing returns to scale for all output levels
D) no clear pattern of returns to scale
Answer: C
Section: 6.4

Short answer question

30) Leann's Telecommunication firm production function is given by y(K, L) = 200 ,

where K is the number of internet servers and L is the number of labor hours she uses. Does
this production function exhibit increasing, constant or decreasing returns to scale? Holding
the number of internet servers constant at 8, is the marginal product of labor increasing,
constant or decreasing as more labor is used?

Answer: Since y(1.1K, 1.1L) = 200 = (200 ) > 1.1y(K, L), we

know the production process exhibits increasing returns to scale. Holding the number of
internet servers constant at 8 will still result in a downward sloping marginal product of
labor curve. That is, the marginal product of labor decreases as more labor is used.
Section: 6.4

31) Ronald's Outboard Motor Manufacturing plant production function is y(K, L) = 25 .

Ronald is investigating a new outboard motor manufacturing technique. Ronald believes
that if he adopts the new technique, his production function for outboard motors will
become: y(K, L) = 36 . Given that Ronald uses 4 units of machine hours, sketch his
production function with the old technique and the new technique as he increases labor
hours. With the new technique, do labor hours contribute more to production?
Answer:

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The slope of the new production function is steeper for all labor uses. This implies the
marginal product of labor is higher for the new technique. This means that labor hours are
contributing at a higher rate for the new technique.
Section: 6.1

32) Sarah's Pretzel Plant produces pretzels according to the function y(K, L) = 100 . K is
the number of ovens, and L is the number of labor hours Sarah uses to produce her pretzels.
At the moment, Sarah uses 9 ovens. Also, she plans to hire 64 labor hours. Sarah can sell
each unit of pretzels produced for $3.50. Fill in the table below. If Sarah increased her use of
labor hours to 65, would the value of the marginal product of labor exceed the wage rate of
$8.50?

y(9, L) L $3.50  MPL

MPL =
64
65
Answer:

y(9, L) L $3.50  MPL

MPL =
1,200 64 6.25 $21.88
1,206.22 65 6.19 $21.66

If Sarah uses 65 hours of labor, the value of the marginal product of the 65th labor hour
exceeds the $8.50 cost of labor. This suggests that if Sarah goes beyond 64 units of labor
hours, her profits will be higher.
Section: 6.2