Question

a. Discuss the importance of production functions in managerial economics? b. What are the decisions making principles in production? c. Explain the difference between diminishing returns and decreasing returns to scale. d. A manufacturer of home appliances faces the production function Q = 40L – L2 + 54 K -1.5K2 with the inputs costs of PL = ¢15 and PK =¢10 i. What is the optimal combination of capital and labour? ii. What is the resulting output when K= 9? iii. What is the minimum cost?

Answer 1

A) a production function consist of amount of capital and labour that is used to produce certain amount of output under specific state of technology. Thus in managerial economics it specify the efficiency of a producion sector and it's inputs. In manegerial economics a production function is the mathematical function that depicts the maximum amout of output that can be produced using available inputs.

B) following principles are followed while making decision about production:

1. Identifing production problem
2. Identifing the available resources
3. Identifing demand for the output in the market
4. Deciding technique of production
5. Selecting alternative
6. Implementing decisions
7. Producing output and distributing among the demand.

C) diminishing returns: diminishing returns imply to that situation when obtained profit or benefit is lesser than the amount of input invested. This is a short run phenomenon in which only one input is variable and total output will first rise and then fall but will not be negative. It will rather in a decreasing rate.
Decreasing returns to scale : it implies if all factors are varied , output will increase at a lesser proportion than inputs. This is a short run phenomenon where all the inputs are variable.

D) detailed calculation is attached below:

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i) OPTIMUM CAPITAL =18 AND LABOUR = 20
ii) OUTPUT AT K = 9 IS 764.5
iii) MINIMUM COST = 480