Week 4 Check Your Understanding

Chapter 7:
1. The amount of fish caught per week on a trawler is a function of the crew
Crew Size
2
3
4
5
6
7
8
9
10
11
12
13

Amount of Fish Caught Per Week (Hundreds of

Pounds)

18
25.5
32
37.5
42
45.5
48
49.5
50
49.5
48
45.5
size assigned to operate the boat. Based on past data, the following
production schedule was developed: (3 points)

Over what range of workers are there:

a. Increasing marginal returns _______________________
b. Decreasing marginal returns _______________________
c. Negative marginal returns ________________________

2. Suppose the firms production function is given by the following relationship:

Q=5L

0.8

0.2

Where the exponents of L (labor) and K (capital) are interpreted as the fixed input
elasticities of labor and capital, respectively.
a. Determine the percentage increase in output (Q) if labor (L) is increased by
10 % while capital is held constant.
b. Determine the percentage increase in output (Q) if capital (K) is increased by
20 % while labor is held constant.
c. Determine the percentage increase in output (Q) if both labor (L) and capital
(K) are increased by 20 %.

3. Consider the following Cobb Douglas Production function for the bus
transportation system in a particular city: (3 points)

Q = LFK
Where L = labor input in worker hours
F= fuel input in gallons
K = capital input in number of buses
Q = output measured in millions of bus miles
The values of the parameters are: (Hint: See the interpretation of the exponents
in Question 3.)

a. Suppose that the labor input (L) is increased by 2% next year (with the
other inputs held constant). Determine the approximate percentage
change in output (Q).
b. Suppose that the capital input (K) is decreased by 2% next year (with the
other inputs held constant). Determine the approximate percentage
change in output (Q).
c. What type of returns to scale appears to characterize this bus
transportation system? (Hint: add the exponents up. If the sum exceeds
1, there is increasing returns to scale, if it is less than 1, there is
decreasing returns to scale, and if it equals 1, there is constant returns to
scale.)

Chapter 8:

1. A certain production process employs only labor (L). Output (Q) is a function of
labor given by the following relationship: (3 points)
Q = 600L2 - 100L3
Where MPL = 1200L - 300L2
(a)

Determine the average product function for input L.

(b) Find the number of units of input L that maximizes the total
product function.
(Hint: set MPL equal to zero and solve for L.)
(c)

Find the number of units of input L that maximizes the average

product function. (Hint: set MPL equal to the APL equation found
in part a and solve for L.)

2. During the last few days the Superior Company has been running into problems
with its computer system. The last run of the production cost schedule resulted in
the incomplete listing shown below. From your knowledge of cost theory, fill in the
blanks. (6 points)
Q
0
1
2
3
4
5
6
7
8
9
10

TC

TFC

TVC

40

ATC
na
52

AFC
na

AVC
na

MC
na

20
21.33
4
40
15.67
10
96
15
45