Assignment 3 – Production

Solution Set
Problem 1 (0.5x8 + 2 = 5 Marks)

Fill in the blanks in the following table:

Marginal Product of the Average Product of the

Number of variable input (L) Total Output (TP) variable input (MP) variable input (AP)
3 18 30
4 20
5 130
6 5
7 19.5

Does the production function stated in the table given the above exhibit diminishing returns? If
so, at what number of units of the variable input do diminishing returns?

Solution

Marginal Product of the Average Product of the

Number of variable input (L) Total Output (TP) variable input (MP) variable input (AP)
3 90 18 30
4 110 20 27.5
5 130 20 26
6 135 5 22.5
7 136.5 1.5 19.5
Yes, the above table exhibits diminishing returns.
5th unit of the variable input is where the diminishing returns sets in

Problem 2 (1 x 4 = 4 Marks)

Consider the following short-run production function (where L is the variable input and Q is the
output)
Q = 6L2-0.4L3
a. Determine the marginal product function (MPL).
b. Determine the average product function (APL)
c. Find the value of L that maximizes Q
d. Find the value of L at which its average product takes on its maximum value.
Solution
a. MPL = 12L – 1.2 L2
b. APL = 6L – 0.4L2
c. Value of L that maximizes Q
MP = 0 => 12L-1.2L2=0 => 1.2(10-L) => L = 10
d. At AP Max
MPL = APL => 12L - 1.2L2 = 6L – 0.4L2 =>L=7.5

Problem 3 (3 Marks)
A firm is producing output using labor and capital in such quantities that marginal product of
labor is 15, and marginal product of capital is 8. The wage rate of labor is Rs.3 and price of
capital is Rs. 2. Is the firm using efficient factor combination for production? If not, what should
it do to achieve economic efficiency?

Solution
MP❑ 8 MP❑L 15 MP❑ MP❑L
k
= =4 ; = =5 ; k
<
r 2 w 3 r w

Problem 4 (1 x 3 = 3 Marks)

A firm produces output according to the production function Q = 10KL2 – L3, where K denotes
the capital stock of the firm, and L denotes the number of workers it hires. Suppose that the firm
has a capital stock K of 10.
a. Derive the firm’s marginal product and average product of labor.
b. At what level of labor does diminishing return set in?
c. At what level of labor is the average product of labor at its highest?

Solution
a. MP = 2 x10x10xL - 3L2 = 200L – 3L2

AP = 10x10xL – L2 = 100L – L2

ⅆMP 200
b. MP Max =200−6 L=¿ L= =33 ⋅33
ⅆL 6
ⅆAP
c. AP Max =100−2 L=¿ L=50
ⅆL