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CHAPTER FIVE
PRODUCTION
OBJECTIVES
1. To introduce the concept of production and to lay the groundwork for the
later discussion about cost. (Basic Production Concepts)
Students often confuse short-run and long-run concepts (for example, the law
of diminishing marginal returns and returns to scale). We find it is useful to
highlight the differences by asking for concepts associated with each and
putting these on the chalkboard. Here is an example:
Short-run Long-run
Inputs and Outputs. Students sometimes get confused between inputs and
outputs when dealing with marginal concepts. That is they get confused
between marginal revenue and marginal revenue product. They also confuse
marginal cost (per unit output) and marginal cost per unit input. We suggest
emphasizing this distinction over and over again. Here is one possible
approach:
Marginal cost per unit of input, for Marginal cost per unit of input
instance, the wage
Isoquants. Some students have problems with the notion of isoquants. One
way to approach this is to ask how a production function with output as a
function of two inputs might be represented graphically. One way is with a
family of total product curves. For example, each curve could graph Q as a
function of L with a distinct K held constant. With this family of curves we
could determine output for any given combination of K and L. (Of course, if
there was not a curve for the chosen value of K we would have to interpolate.)
I. Short Readings
M. Ramsey, “Fuel Goal Tests Ford’s Mettle,” The Wall Street Journal,
January 13, 2014, p. B1.
J. Markoff, “Skilled Work without the Worker,” The New York Times,
August 19, 2012, p. A1.
“Calling across the Divide,” The Economist, March 12, 2005, p. 74.
(The link between cell phones and economic growth in the developing world.)
H. R. Varian, “IT May or May Not Matter; it Depends How You Use it,” The
New York Times, May 6, 2004, p. C2.
L. Zinser, “Path to the Super Bowl No Longer Lined with Stars,” The New
York Times, February 1, 2004, p. A12. (Building a winner under the salary
cap.)
“Incredible Shrinking Plants,” The Economist, February 23, 2002, pp. 71-73.
Advice from the coach to his star player who has made four Fs and one D:
“Son, look's to me like you're spending too much time on one subject."
Production not being the sole end of human existence, the term unproductive
does not necessarily imply any stigma. (John Stuart Mill)
2. The production function, Q = 10L - .5L2 + 24K - K2, has marginal products:
MPL = 10 - L and MPK = 24 - 2K. Both marginal products decline;
therefore, there are diminishing returns. Starting from any L and K,
doubling the use of both inputs generates less than double the level of
output. Thus, the production function exhibits decreasing returns to scale.
3. a. The marginal products for labor and capital are given by: MP L = 10 - L
and MPK = 24 - 2K. For L equal to K (in the range 0 to 10), capital's
marginal product is greater than labor's. At the same input prices, the
firm will use more capital than labor.
b. Setting the price of each input equal to its marginal revenue product
implies: 100 - 10L = 40, or L = 6 units, and 240 - 20K = 80, or K = 8
units.
6. a. In the short run, the restaurant should hire more wait staff (and possibly
chefs) and squeeze in some extra tables so as to produce the maximum
number of (delicious) meals per night. Clearly, given the restaurant’s
small quarters (fixed capacity), applying extra labor inputs will quickly
run into diminishing returns.
b. In the longer run, the restaurant would be wise to increase its entire scale
of operation. Perhaps, it could expand its space in the new building. If
not, it might even consider opening a second restaurant in a carefully
scouted location. In either case, it is much more efficient to produce
gourmet meals using the “right” mix of culinary labor and distinctive
restaurant floor space.
b. The cost of the 68-60 mix is: ($.10)(68) + ($.07)(60) = $11.00 per day.
The cheapest diet is a 56-70 mix; its cost is $10.50 per day.
c. For a 200-pound steer, the cheapest mix is 56-70. Given constant returns
to scale, feeding a 250-pound steer would require (250/200) = 125
percent of this amount. A 70-87.5 mix (at a cost of $13.125) is needed.
9. a. Production of steel by electric furnace has the lowest average cost per ton
($325). Therefore, its share of production would be expected to increase
over time.
11. a. The grade improvements offered by extra hours of studying finance are
8, 5, 5, 2, and 2 points. For economics, the improvements are 6, 4, 2, 2,
and 1 points.
b. The “first” hour should be devoted to finance (an 8-point increase), the
next hour to economics (6 points), the next 2 hours to finance (5 points
each hour), and the “last” hour to economics (4 points). The student’s
predicted grades are 88 and 85.
12. The optimal input condition is: MPK/MPL = PK/PL. The inputs’ respective
marginal products are: MPK = ßLαKß-1 and MPL = αLα-1Kß. Therefore,
the ratio of the marginal products is: MPK/MPL = (ß/α)(Lα/Lα-1)(Kß-1/Kß)
= (ß/α)(L/K). Setting this equal to PK/PL and rearranging yields: L/K =
(α/ß)(PK/PL). Other things equal, an input's use increases the greater its
output elasticity or the lower its price.
13. a. For N1 = 16 and N2 = 24, the average catch at the first lake is Q1/N1 =
[(10)(16) - .1(16)2]/16 = 8.4 fish, and the average catch at the second lake
is Q2/N2 = [(16)(24) - .4(24)2]/24 = 6.4 fish, respectively. Lured by the
greater average catch, some number of fishers will leave the second lake
for the first.
Spreadsheet Problems
b. In the long run, the firm should use L* = 64.64 and K* = 39.64 to
produce 175 units (the output found in part a) at minimum total cost.
Using the spreadsheet optimizer, minimize cell I9 (cost) by changing
cells C5 and F5 subject to cell I3 (output) being greater or equal to 175.
Relative to the short run, total cost falls from 1,500 to 1,439 and profit
rises to 311. At this optimal solution, MPL//MCL= MPK/MCK.
S2 a. (We assume that the student has created a new spreadsheet for this
problem based on the format of the example on page 222 of the text.)
In the short run with a fixed price P = $10 and capital at K = 9, the
optimal employment of labor is L* = 25. At this level, labor’s marginal
revenue product is equal to the wage: MRPL = PL = 36. Total output is
180 units. To confirm this result, invoke the spread-sheet optimizer and
maximize profit in cell I12 by changing cell C5.
b. The firm seeks to produce 180 units at minimum cost. Using the
spreadsheet optimizer, minimize cost in cell I9 by changing cells C5
and F5, subject to output in cell I3 being greater or equal to 180. The
result is L* = 10 and K* = 22.5. Here, MPL/PL = MPK/PK = .25.
c. If PL falls to 18, we use the optimizer to find the new least-cost input
mix: L* = 14.1 and K* = 15.9. The lower input price of labor induces
the firm to increase its ratio of labor to capital.
S3. a. Using the spreadsheet optimizer, the objective is to maximize cell E12
by changing cells C8, D8, and D10, subject to cell F12 being greater or
equal to the value of 32 in cell F14. According to the solution,
aluminum in trucks should increase to a proportion of 5.4 percent,
aluminum in cars should be 7.2 percent, and the fleet share of trucks
should be 52 percent. Average fleet-wide contribution is maximized at
$7,673 per vehicle (up from $7,200 if there were no aluminum
increase).
Ya dexan infortunios la
posada
de vn coraçon en fuego
consumido,
y una alegria viene no
pensada.
Bolued, mi coraçon
sobresaltado
de mil desassosiegos, mil
enojos:
sabed gozar si quiera un buen
estado.
No uienes, mi pastora
desseada?
ay Dios, si la ha topado, o se
ha perdido
en esta selua de arboles
poblada?
Glosa.
Qué tiempos, que
mouimientos,
qué caminos tan estraños,
qué engaños, qué
desengaños,
qué grandes contentamientos
nasçieron de tantos daños:
todo lo sufre vna fe
y un buen amor lo assegura,
y pues que mi desuentura,
ya de enfadada se fue,
ven, ventura, uen y dura.
Sueles, ventura, mouerte
con ligero mouimiento,
y si en darme este contento
no ymaginas tener fuerte,
más me uale mi tormento;
que si te vas al partir,
falta el seso y la cordura:
mas si para estar segura
te determinas venir,
ven, ventura, uen y dura.
Si es en uano mi uenida,
si acaso biuo engañado,
que todo teme vn cuytado,
no fuera perder la uida
consejo más açertado?
o temor, eres estraño,
siempre el mal se te figura,
mas ya que en tal hermosura
no puede caber engaño,
ven, ventura, uen y dura[1265].
Qvando Belisa oyó la musica de
su Arsileo, tan gran alegría llegó a
su coraçon, que sería imposible
sabello dezir, y acabando de todo
punto de dexar la tristeza que el
alma le tenía occupada, de
adonde procedia su hermoso
rostro no mostrar aquella
hermosura de que la naturaleza
tanta parte le auia dado, ni aquel
ayre y graçia, causa prinçipal de
los sospiros del su Arsileo, dixo
con vna tan nueua graçia y
hermosura que las Nimphas dexó
admiradas: Esta sin duda es la
boz del mi Arsileo, si es verdad,
que no me engaño en llamarle
mío. Quando el pastor vio delante
de sus ojos la causa de todos sus
males passados, fue tan grande
el contentamiento que reçibió,
que los sentidos, no siendo parte
para conprehendelle en aquel
punto, se le turbaron de manera
que por entonçes no pudo hablar.
Las Nimphas sintiendo lo que en
Arsileo auio causado la vista de
su pastora, se llegaron a él a
tiempo que suspendiendo el
pastor por vn poco lo que el
contentamiento presente le
causaua, con muchas lagrimas
dezia: O pastora Belisa, con qué
palabras podré yo encaresçer la
satisfacçion que la fortuna me ha
hecho de tantos y tan desusados
trabajos, como a causa tuya, he
passado? O quién me dara un
coraçon nueuo, y no tan hecho a
pesares como el mío, para reçebir
vn gozo tan estremado, como el
que tu uista me causa? O fortuna,
ni yo tengo más que te pedir, ni tú
tienes más que darme. Sola una
cosa te pido. Ya que tienes por
costumbre, no dar a nadie ningun
contento estremado, sin dalle
algun disgusto en cuenta dél, que
con pequeña tristeza, y de cosa
que duela poco, me sea templada
la gran fuerça de la alegria, que
en este dia me diste: O hermosas
Nimphas, ¿en cuyo poder auia de
estar tan gran thesoro, sino en el
vuestro, adonde pudiera él estar
mejor empleado? Alegrense
vuestros coraçones con el gran
contentamiento, que el mio
resçibe: que si algun tiempo
quesistes bien, no os paresçerá
demasiado. O hermosa pastora,
por qué no me hablas? ha te
pesado por ventura de ver al tu
Arsileo? ha turbado tu lengua, el
pesar de auello uisto, o el
contentamiento de velle?
Respondeme, porque no sufre lo
que te quiero yo estar dudoso de
cosa tuya? La pastora entonçes le
respondio: muy poco sería el
contento de verte (o Arsileo) si yo
con palabras pudiesse dezillo.
Contentate con saber el extremo
en que tu fingida muerte me puso,
y por él verás la gran alegria en
que tu vida me pone. Y viniendole
a la pastora, al postrero punto
destas palabras, las lagrimas a
los ojos, calló lo mas que dezir
quisiera: a las quales las Nimphas
enternesçidas de las blandas
palabras que los dos amantes se
dezian, les ayudaron. Y porque la
noche se les açercaua, se fueron
todos juntos hazia la casa de
Feliçia, contandose vno a otro lo
que hasta alli auian passado.
Belisa preguntó a Arsileo por su
padre Arsenio: y el respondio que
en sabiendo que ella era
desaparesçida, se auia recogido
en una heredad suya, que está en
el camino, a do biue con toda la
quietud posible, por auer puesto
todas las cosas del mundo en
oluido, de que Belisa en extremo
se holgó, y assi llegaron en casa
de la sábia Feliçia donde fueron
muy bien reçebidos. Y Belisa le
besó muchas vezes las manos,
diziendo que ella auia sido causa
de su buen suçesso, y lo mismo
hizo Arsileo, a quien Feliçia
mostro gran voluntad de hazer
siempre por él lo que en ella
fuesse.