DEGREE IN ECONOMICS AND FINANCE

MICROECONOMICS: CONSUMPTION AND PRODUCTION

(COURSE 20152016, 1st YEAR)
Prof. Brindusa Anghel

LIST OF EXERCISES UNIT 6

(THE THEORY OF PRODUCTION)

1. For each of the following examples, draw a representative isoquant. What can you say about
the marginal rate of technical substitution in each case?
a) A firm can hire only full-time employees to produce its output, or it can hire some
combination of full-time and part-time employees. For each full-time worker let go, the
firm must hire an increasing number of part-time employees to maintain the same level
of output.
b) A firm finds that it can always trade two units of labor for one unit of capital and still
keep output constant
c) A firm requires exactly two full-time workers to operate each piece of machinery in the
factory

2. Do the following functions exhibit increasing, constant or decreasing returns to scale? What
happens to the marginal product of each individual factor as that factor is increased and the other
factor is held constant?
a) = 3 + 2
b) = (2 + 2)1/2
c) = 41/2 + 4

3. The production function for the personal computers of DISK Inc. is given by
1 = 10 0.5 0.5
where q is the number of computers produced per day, K is hours of machine time, and L is hours
of labor input. DISKs competitor, FLOPPY Inc. is using the production function
2 = 10 0.6 0.4.
a) If both companies use the same amounts of capital and labor, which will generate more output?
b) Assume that capital is limited to 9 machine hours, but labor is unlimited in supply. In which
company is the marginal product of labor greater? Explain.

4. Complete the following table. Explain whether this production exhibits diminishing marginal
returns to labor.

Quantity of variable Total output Marginal product of Average product of

input variable input variable input
0 0 - -
1 50
2 30
3 90
4 24
5 4
6 96

1
5. Suppose a production process such that the firm can always substitute 1 unit of capital for 4
units of labor to maintain the level of production constant.
a) Draw the isoquant curves associated to this production process. How are K and L?
b) What can you say about the MRTS and about the marginal product of both factors of
production?

6. Imagine a production process in which the MRTS(L,K) is always equal to -1/3. How much the
use of L should increase, if we reduce the amount of K in 6 units and we want to maintain the
level of production constant?

7. Suppose a production function given by = 3/4 1/4. Suppose we are in the shortrun.
a) Calculate the marginal product of labor and the average product of labor.
b) How are the returns to scale of this production function?
c) How are the marginal returns with respect to labor?

8. Suppose the following production function (, ) = 3/2 1/2 32. In the short-run, the
level of capital is fixed, K=25.
a) For which values of labor, the production function exhibits diminishing marginal returns
with respect to labor (draw the curve of Marginal Product of labor)?
b) What would be the maximum amount of labor that the firm would be willing to hire?