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Economics Revision Questions

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Submitted By Olive26
Words 837
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Q.1
Consider the following Cobb-Douglas production function for your company

a. suppose both labor and capital inputs are 20 percent each, determine the approximate change in output
LnQ=1.345LnL+1.5LnK ∆LnQ=1.345x20%+1.5x20%=57% b. What type of returns to scale characterizes this production function? How do you know?
1.345+1.5=2.845>1 so it is increasing return of scale
c. Based on the production function, determine an expression for the marginal product of labor if 20 units of capital are employed. K=20 Q=L1.345201.5=89L1.345 MPL=∆Q∆L=89×1.345×L0.345=120L0.345
Q.2
Explain the meaning of a ‘long run average cost curve’. When is it downward sloping? (5 lines) A curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production. when the curve is declining it indicates economies of scale.

Q.3
True or False and why? “If it cost $20 on average to produce 100 units of x and it costs $20.20 on average to produce 101 units of x, then the marginal cost when producing unit #101 is 20 cents” It is wrong. MC=∆TC∆Q TC of 100 units is 20x100=2000 TC of 101 units is 20.2x101=2040.2 MC=2040.2-2000101-100=40.2

Q.4
Having just completed a class in “production and costs”, Rohan, the owner of Zee Industries, decided to pay his workers a wage equal to the value marginal product (w =MPL*P). He found out that his labour employment is at a point where MPL>APL. In what stage of production is he operating? Is he maximizing profits at this point? Explain fully It is in the first stage of production. At this point, company is not maximizing its profits,. At first stage company can increase its value by increase input. At third stage, Mp is negative, increase input will decrease the value of company. Company

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