Question

_{PRODUCTION HOMEWORK QUESTIONS PLEASE ANSWER ALL QUESTIONS AND PARTS!}

_{1.What is the marginal product of labor (MP or MPP)?  Why is the curve shaped the way it is?}

_{2.Explain and describe each of the four production relationships.}

_{3.Indicate whether each of the following are long-run or short-run choices.  Explain why.}

1. _{A law partnership signs a 5 year lease for an office complex.}
2. _{A jeans company asks its assembly-line workers to work an extra shift this week.}
3. _{A local oil refinery plans a complete restructuring of its production process, including relocating the plant.}
4. _{The local college decides to offer an extra section of micro-economics this summer.}
5. _{A farmer increases the quantity of water applied to his fields.}
6. _{The university hires a new football coach on a three year contract.}
7. _{The corner hot dog vender decides to buy an additional cart.}

_{4.In what two ways can “returns to scale” be used.  Give an example of each way.}

Answer 1

1. Marginal Product (MP) or Marginal Physical Product (MPP) is the addition made to the total output produced as a result of a single unit of the variable factor used for producing the given output. Generally, this variable factor is assumed to be labor, since in a given time period, it is not possible to shift the use of some factors like land, machines and so on (collectively known as capital) hence the easier factor whose proportion can be varied to arrive at the optimum level of output is labor (or the variable factor).

The shape of the MP curve is positively sloping till the ‘point of inflexion’, (or the point from where the MP curve starts falling), from there on wards it is negatively sloped and even at time touches the x-axis or goes beyond it (in to negative ) indicating that until the point of inflexion (which is the highest point on the MP curve) each additional unit of the variable factor is adding more and more to the total output such that given a certain amount of fixed factor which cannot be changed in the short run, the output is said to be increasing at a faster rate.

However, beyond the point of inflexion, the total output registers a lesser proportion of growth, since successive units of the variable factor do not add much to the total quantity produced so much so that the marginal productivity of each variable unit beyond the point of inflexion reduces continuously, becomes zero and may even go into negative productivity level if the producer continuously applies more and more units of the variable factor to a given fixed factor.

2. Four Production Relationships:

1. Land:

It is one of the most important actor of production—it includes all land, like forests, mines and all natural resources. Though it is fixed in supply yet its use can be altered—land can be used for agriculture or industries and so on. Its factor reward is rent

Labor

It refers to the effort made both physically and by using our intelligence

towards an economic activity. It is an active factor of production , its productivity depends upon its skill and its factor reward is wages.

Capital

It refers to man made goods which are long lasting and are used for further production –for example, an ice cream making machine is ‘capital’, since it would be used for producing ice creams. Its factor reward is interest (since capital also means money used for production process, we assume that a producer may take a loan for his business and may have to pay interest for that loan)

Entrepreneur.

He is the person who organises all the other factors of production in such a proportion that he is able to minimise risks and maximise profits. In easy terms he is called a ‘businessman’. His factor reward is profit. He has to undertake the risk of combining all the other factors in the right way to proceed with a given business goal.

3.

1. Signing a five year lease is a long run choice since , the lease may be fixed for the five year period but the law firm could grow in terms of its business and earn more revenue over the five year period.
2. The company asking its workers to work an extra shift is a short run choice since the shift may not be extended beyond the week or even if its so extended it may be a temporary move just to meet the rise in demand for ‘jeans’ and once the required production level is reached the workers may be given relief and reverted to their earlier usual working hours

3. The oil refinery’s decision is a long run choice since its complete restructuring and relocation plan have far flung effects and would take a lot of time to actually be realised.

4. The micro economics session is a short run choice since it could only be a summer based course and would be eventually stopped once the college reopens after vacation.

5. The decision of the farmer is short run , since he could change the quantity of water applied to his fields on a daily basis .

6. The hiring of the football coach for a three year period is a long run choice. The coach will remain with the University for three years hence his productivity might change (rise or fall ) but his contract remains for a long period of three years.

7.Buying an additional cart is investing in capital for a long time gain, hence it is an long run choice.

4. Uses of returns to scale:

Returns to scale studies the output pattern when all factors used in the production process are varied simultaneously in a given proportion.

1.It helps the entrepreneur gauge the trends in the proportion changes and helps him to identify the optimum output to be achieved in the long run. For example, if by combining a unit of labor and a unit of capital ( a machine), gives about 100 units of output , and by increasing both the factors simultaneously -- 2 units of labor and 2 units of capital , the entrepreneur discovers that the output rises to 250 units , then he can arrive at the conclusion that the business is experiencing higher returns and that it would be beneficial for him to use such a factor proportion .

2.

2. Returns to scale are very useful in identifying economies of scale or simply put, lower per unit costs of production. If the business is experiencing increasing returns to scale then it could indicate that the proportion of costs to output is relatively low. This helps the entrepreneur in arriving at the minimum point of the long run average cost curve where he would be producing the optimum output.

   On the other hand if the costs are rising, then he should redraw the cost structure since the firm might be experiencing diseconomies to scale or higher per unit costs.