NUMERICAL ON PRODUCTION FUNCTION

Important: Formulae and relations:

TP=L x AP L =∑ MP L

d (TP)
MP L =
dL

TP
APL =
L

Where APL, MPL are average productivity or marginal productivity of any factor input say labour.

1. Consider the following production function.

Y= AKa Lb

Where:
 Y = total real output
 K = capital input (the real value of all machinery, equipment, and buildings)
 L = labour input (the total number of person-hours worked in a year)
 A = total factor productivity
 a and b are parameters determined by available technology.

Further, A, a and b >0 and a + b =1

Show that marginal and average productivity of labour and capital are functions of factor ratio.

Solution: Here,

Y
APL= L

a b
AK L
= L
= AK1-bLb-1 , since a + b =1 or, a = 1-b

1−b
AK
1−b
= L
L
=Af( K )

Hence, APL is function of factor proportion.

L
Similarly, APk= A f ( K )

dY
MPL= dL

a b
d ( AK L )
= dL

a b−1
Ab K L
= L

= Ab K1-bLb-1 , since a + b =1 or, a = 1-b

1−b
Ab K
1−b
= L
K
= Ab f ( L )

Hence, MPL is function of factor proportion.

L
Similarly, MPk= Aa f ( K )
11. Fill in the blanks

Quantity of Total Marginal Product Average Product

Variable Input Output of Variable Input of Variable Input
0
1 225
2 600 375 300
3 900 300
4 240 285
5 1365 273
6 1350 -15

Solution:

Quantity of Total Marginal Product Average Product

Variable Input (L) Output(Q) of Variable Input of Variable Input
(dQ/dL) (Q/L)
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
12. a. Question: Marty’s Frozen Yogurt is a small shop that sells cups of frozen yogurt in a
university town. Marty owns three frozen-yogurt machines. His other inputs are
refrigerators, frozen-yogurt mix, cups, sprinkle toppings, and, of course, workers. He
estimates that his daily production function when he varies the number of workers
employed (and at the same time, of course, yogurt mix, cups, and so on) is as shown in the
accompanying table.

Quantity of labor Quantity of frozen

(workers) yogurt (cups)

0 0
1 110
2 200
3 270
4 300
5 320
6 330

a. What are the fixed inputs and variable inputs in the production of cups of frozen yogurt?
b. Draw the total product curve. Put the quantity of labor on the horizontal axis and the
quantity of frozen yogurt on the vertical axis.
c. What is the marginal product of the first worker? The second worker? The third worker?
Why does marginal product decline as the number of workers increases?

Solution:
a. Fixed inputs: shop, frozen-yogurt machines, refrigerators,
Variable inputs: frozen-yogurt mix, cups, sprinkle toppings, and workers

b.

110−0
c. MP of 1st worker = ( 1−0 ) = 110
Similarly, MP of 2nd and 3rd worker is 90 and 70 respectively.

MP of worker is falling because with use of more worker, labour which is variable become
abundant relative to machines which is fixed and indivisible. This makes machines
inadequate relative to worker and as such marginal productivity of labour falls.