CHAPTER 6
PRODUCTION

QUESTIONS FOR REVIEW

1. What is a production function? How does a long-run production function differ from a short-run production function?

A production function represents how inputs are transformed into outputs by a firm. We focus on the firm with one output and aggregate all inputs or factors of production into one of several categories, such as labor, capital, and materials. In the short run, one or more factors of production cannot be changed. As time goes by, the firm has the opportunity to change the levels of all inputs. In the long-run production function, all inputs are variable.

2. Why is the marginal product of labor likely to increase initially in the short run as more of the variable input is hired?

The marginal product of labor is likely to increase initially because when there are more workers, each is able to specialize on an aspect of the production process in which he or she is particularly skilled. For example, think of the typical fast food restaurant. If there is only one worker, he will need to prepare the burgers, fries, and sodas, as well as take the orders. Only so many customers can be served in an hour. With two or three workers, each is able to specialize and the marginal product (number of customers served per hour) is likely to increase as we move from one to two to three workers. Eventually, there will be enough workers and there will be no more gains from specialization. At this point, the marginal product will diminish.

3. Why does production eventually experience diminishing marginal returns to labor in the short run?

The marginal product of labor will eventually diminish because there will be at least one fixed factor of production, such as capital. With capital fixed, the workplace will eventually become so congested, that the productivity of additional workers will