Question

True or false (explain). If a firm is maximizing profits, then the value of the marginal product of each factor that it is free to vary must equal its factor price.

2. True or false (explain). If a competitive firm exhibits constant returns to scale, then its long run maximum profit must be constant.

3. True or false (explain). The assumptions of a diminishing marginal product and diminishing technical rate of substitution are the same.

4. True or false (explain). If a firm is maximizing profits and it chooses to supply some output y, then it must be minimizing the cost of producing y.

5. Suppose that we have certain amount of factors 1 and 2 and we consider adding more of factor 1 while holding factor 2 fixed at a given level. What might happen to the marginal product of factor 1?

6. The technical rate of substitution between factors X2 and X1 is – 5. If you desire to produce the same amount of output but cut your use of X2 by 4 units, how many more units of X1 will you need?

7. What is the relationship between the returns to scale exhibited by the technology and the behavior of the cost function?

8. If the marginal revenue of factor 1 is greater than its marginal cost, should the firm increase or decrease the amount of factor 1 in order to increase profits?

Answer 1

Q(1)

Definitely, If a firm is maximizing profits, that means the price should be equal to or greater then the marginal cost and then the value of the marginal product of each factor that it is free to vary must equal its factor price and even in some case, it will be greater then the factor price.

Answer - True

Q(2)

So in a case of competitive firm price is always equal to marginal cost and as we know in constant return to scale case there is always the same level of output as the proportional input is, thus we can say in the case of long-run profit always remains constant.

Answer - True

Q(3)

Diminishing marginal product is defined as the increase in the one input with an increase in the other output but after some time the output may start decrease whereas in the case of MRTS is defined as the increase the rate at which one factor must decrease so that the same level of productivity can be maintained when another factor is increased thus the two are different in nature of their production process

Answer - False

Q(4)

Definitely, to maximize the profit we have to minimize either the marginal cost or price of the product and that's the only way to gain maximum profit

Answer - True

Q(5)

AS if we are adding more of factor 1 while holding factor 2 fixed at a given level then, in that case, we can say then the marginal product of factor 1 would decrease

Answer - Decrease