Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 7.A, Problem 2P
To determine
The suggestion to improve profit.
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Students have asked these similar questions
In the isoquant/isocost diagram to the right, suppose that the firm is producing 1,000 units of output at
point A using 100 units of labor and 200 units of capital. As an outside consultant, what actions would
you suggest to management to improve profits?
The firm can cut costs by hiring more
and less
Units of capital (K)
300-
250-
A
200-
150-
100-
50-
B
q = 1,000
0
50
100
150 200
250
300
Units of labor (L)
Q
☑
E3
Instructions: Move the slider at the bottom of the diagram to change the quantity of labor hired for both graphs and the table.
Move the production slider to 6 units of labor. Suppose you had the information for the L=2 row and the L=6 row, but the row(s) in between them were missing and you didn't have any information in the Marginal Product column. If you wanted to estimate the marginal product, you might assume the marginal products of each of the 4 additional workers are equal.
a. Estimate the marginal product of each additional worker if L were to increase from 2 to 6.
b. Calculate the slope of the total production function between L=2 and L=6.
Chapter 7 Solutions
Principles of Economics (12th Edition)
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- Question 11 Consider a call center with production function f(L,K)=30L+300K, where L is units of labor and K is units of capital. Denote by APL(L,K)=f(L,K)/L the so-called average product of labor (here f is the production function of the firm). Suppose that K=2. For which amounts of labor is the Average Product of Labor equal to 10? Between 1 and 10 Between 31 and 40 There is no level of labor for which APL is equal to 10. Between 11 and 20 Between 21 and 30arrow_forwardam. 131.arrow_forward22. Suppose a firm has a production technology given by the Cobb-Douglas production function: Q = f(L,K) = AL¤ KB with a + ß 0, where L and K represent labour and capital respectively and A is technology. (a) Does this production function exhibit constant, increasing or decreasing returns to scale? Explain how you would be able to see this on an isoquant graph. (b) Set out the unconstrained profit maximisation problem (assuming input prices are w for labour and r for capital and the output price is p) and then solve for the unconditional input demand functions for capital and labour and find the firm's supply function (c) Now set up the cost minimisation problem and solve for the conditional labour and capital demands. What is the difference between the unconditional input demand functions from part (b) and the conditional input demand functions you have just derived? (d) Give an expression for the total cost function (no need to simplify) and explain how the average and marginal cost…arrow_forward
- Suppose the long-run production function for a competitive firm is f(x1,x2)= min {3x1,2x2}. The cost per unit of the first input is w1 and the cost of the second input is w2. A: Find the cheapest input bundle, i.e. amount of labor and capital, that yields the given output level of y. B: Write down the formula and draw the graph of the firm’s total cost function as a function of y, using the conditional input demand functions. What is the relationship between the returns to production scale and the behavior of the total costs? C: Write down the formulas and draw the graphs of the average cost and marginal cost functions, as functions of y.arrow_forwardI need all four parts answered and explained. Thank you.arrow_forwardShow full steps & answers to the exercisesarrow_forward
- Question 10 Consider a firm whose cost function when both L and K are variable is shown in the figure below. (The following is a description of the figure. In a two-axis graph we measure q in the horizontal axis and dollars $ in the vertical axis. A single curve labeled C is shown in the figure. It is a linear curve with positive slope). Then, the Marginal cost function associated with this production is: Flat First decreasing and then increasing Increasing Decreasing Verticalarrow_forwardThe following table shows estimates of Cobb-Douglas production function parameters for several industries. Industry Food and beverages Textiles Furniture Petroleum Stone, clay, etc. Primary metals Food and beverages Textiles Petroleum Stone, clay, etc. Textiles Primary metals Stone, clay, etc. Food and beverages Which of the following industries appear to exhibit decreasing returns to scale? Check all that apply. Capital Elasticity (B₁) 0.555 Source: John R. Moroney, "Cobb-Douglas Production Functions and Returns to Scale in U.S. Manufacturing Industry," Western Economic Journal 6, no. 1 (December 1967): Table 1, p. 46. Stone, clay, etc. 0.121 Which industry comes closest to exhibiting constant returns to scale? Furniture 0.205 Petroleum 0.308 0.632 0.371 Primary metals Production Worker Elasticity (B₂) 0.439 0.549 0.802 0.546 0.032 0.077 Nonproduction Worker Elasticity (B3) 0.076 0.335 0.103 0.093 0.366 0.509 In which industry will a given percentage increase in production workers…arrow_forwardThe following table shows the capital and labor requirements for 10 different levels of production. Assuming that the price of labor (PL) is $8 per unit and the price of capital (PK) is $6 per unit, compute and graph total cost, marginal cost, and average cost for the firm. To do this, fill in the total cost for each output level in the table below. (Enter your responses as whole numbers.) 9 0 1 2 3 4 5 6 7 8 9 10 K 0 20 20 20 20 20 20 20 20 20 20 L 0 3 7 10 13 17 23 31 41 53 67 TC 0 Cost per unit ($) 0 1 2 3 4 5 6 7 8 9 10 11 12 Units of output Q ✔arrow_forward
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