Question

(1)On the one-input business firm:(a)The firm ought to produce in the Stage II of production. Discuss, graphically,the characteristics of Stage II production. (b)If the supply of input is perfectly elastic (flat supply), graphically show the maximum possible Q the firm may produce. (c)If the supply of input is inelastic (positively-sloped supply), graphically show the maximum possible Q the firm may produce. Would the firm prefer perfectly elastic or inelastic input supply and why?(d)Given inelastic input supply, how the firm may produce more.

Answer 1

1(a) stage II of production is the stage of diminishing returns to the variable input. In this stage the total product goes on increasing, but at a diminishing rate. It reaches the maximum as shown by point T in Fig-1 below, and the second stage ends here. In this stage both the marginal product and average product of the variable factor are diminishing, but are positive. The second stage starts from the point where average product(AP) IS MAXIMUM, i.e., point A. It ends where marginal product is zero. This is shown by the MP curve reaching _L3 onthex_-axis. Thus , this stage starts from the employment of L2 workers and ends up when L3 workers are employed, corresponding to which the TP is maximum and MP is zero. This stage is most important as producers would like to operate in this stage.​​​​

1(b) If the supply of input is perfectly elastic, it will be parallel to the horizontal axis. This supply curve implies that the firm has access to any amount of input at a fixed cost. It is the case of a constant cost industry. Since the input price remains unaffected. Thus the long run market supply for this constant cost industry is perfectly elastic as shown in fig-2. Here Q* is the firm's optimum output produced.