Question

Suppose you own a small maple syrup company which requires employees to feed wooden logs into large machines that burn the logs and boil water out of the sap.At current units of production, one machine and a worker working for a day can produce 100 bottles of maple syrup. A new machine could be rented for $1000/day while new workers can be hired for $100/day but having an additional machine would produce 90 bottles of maple syrup, while an additional worker would produce only 10 additional bottles of maple syrup. a. What is the fixed input and what is the variable input?

b. In the short run, which input would you use more of to increase output? Why?

c. In the long run, which input would you use more of to increase output? Why?

d. Assuming every additional machine produced 90 bottles per day and additional workers continued to produce 10 bottles per day, would this be considered economies of scale? Why or why not?

e. Why is the assumption in part (d) unrealistic?

Answer 1

a) Fixed input is machine and variable input is workers.

Fixed inputs are those inputs the quantity of which cannot be increased or decreased in the short run. Variable inputs are those inputs the quantity of which can be easily changed in the short run.

b) In short run, variable input will be used more to increase output.

Why? Because short run is the time period during which the amount of some inputs, called the fixed factors, cannot be changed. Hence, an increase in the ouput in the short run can be brought by increasing the variable inputs.

c) In long run, fixed input will be used more to increase output.

Why? Because long run is the time period during which amount of all inputs can be changed. A firm in the long run can set up new factory building or can install a new plant. So, to increase output in the long run fixed input will be used more.

d) Assuming, every additional machine produced 90 bottles per day and additional workers continued to produce 10 bottles per day, this will be considered economies of scale. Economies of scale arise when a firm increases its scale of production. When an additional machine and an additional worker will be kept, scale of production will increase and economies of scale will accrue to the firm.