Question

4. For any given interest rate, the quantity of investment which is optimal for a firm will be the one where ________=_________

5. We normally assume that production functions exhibit __________________ returns to scale and _____________________ marginal product of all inputs.

6. If there is a technological advancement which makes firms more productive, it will cause a(n) ___________________ in the _________________ for loanable funds.

Answer 1

4.

The firms objective is to maximize profit gives the prices of inputs and the price of the good. The firm will demand a factor of production until the value output produced by the last input employed is equal to the price of the input. This implies the revenue from the last quantity of output produced must be equal to the incremental cost of the input. Increasing the input further will decrease revenue due to diminishing marginal return and the marginal profit of the firm will be negative. Then at equilibrium:

• ____P*MPK____=___interest rate (r)______

5.

The return to scale is the study of the change in output as all the factor of production is increased by the same proportion. The general assumption about the production function is that the function exhibit a constant return to scale. That is if the factors are changed by the same proportion, the output will change by that proportion as well.

The factors of production in a CRS production function exhibit diminishing marginal returns. That is when one-factor is changed keeping others constant the output increases with decreasing rate.

• production functions exhibit _______constant___________ returns to scale and _______diminishing______________ marginal product of all inputs.

6.

In the case of technological advancement, the factor of production can be increased more intensively. That is the output will increase without affecting the cost of the firm. This will increase demand for the factor of production and demand for loan. Thus there will be an increase in the demand for loanable funds in the market.

• it will cause a(n) ___increase___ in the ____demand____ for loanable funds.