Question

In: Economics

Write out the production function. What do each of the variables in the function represent? (i.e....

Write out the production function.


What do each of the variables in the function represent? (i.e. factors that determine productive capability)


Which of these factors are key to long term sustainable growth?

Solutions

Expert Solution

Production function =

Qx = f(L,K) where Q=Quantity, L = Labor and K= Capital

The equation explains that a maximum output can be produced from these two inputs ( underlying assumption being that Labor and Capital are the only inputs.)

10x = f(2L,4K) means that 10 units of commodity can be produced using 2 units of Labor and 4 units of Capital.

To conclude PRoduction function understand the optimum level of output from a feasible combination of inputs. So at a given level of price of labor and capital, it can determine how much of output a firm can produce. This way it also gives an idea about the increasing or decreasing returns to scale and the marginal product of labor and capital.

In the long run, the production function examines the variability of these factors of production. So for every additional unit of input used, what is the additional quantity produced. So this way we know that beyond a certain level of input used, the output production shall not increase significantly. The inputs work on the law of diminishing returns.


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