Chapter 5: Production
Production Theory
Chapter Review
The production function defines the relationship among various inputs and the maximum
quantity of a good that can be produced. Managers study production functions to gain insights
into the firm's cost structure.
An isoquant is a curve showing all possible (efficient) combinations of inputs capable of
producing a particular quantity of output. The marginal rate of technical substitution shows the
rate at which one input can be substituted for another input if output were held constant. No
profit-maximizing manager will operate at a point where the isoquant is positively sloped.
To minimize the cost of producing a particular output, a manager should allocate expenditures
among various inputs so that the ratio of the marginal product to the input price is the same for
all inputs used. Graphically, this amounts to choosing the input combination where the relevant
isoquant is tangent to an isocost curve.
If a manager increases all inputs by the same proportion and output increases by more (less)
than this proportion, there are increasing (decreasing) returns to scale. Increasing returns to
scale may occur because of indivisibility of inputs, various geometrical relations, or
specialization. Decreasing returns to scale can also occur; the most frequently cited reason is the
difficulty of managing a huge enterprise. Whether there are constant, increasing, or decreasing
returns to scale is an empirical question that must be settled case by case. Managers have
estimated production functions in many firms and industries. Many studies show that a Cobb-
Douglas function is the best fit for the data.
1 If the production function is the same as is given in question 17, which of the following is a
true statement regarding the marginal product of capital?
1. It is smaller than the marginal product of labor.
2. It is decreasing with respect to labor.
3. It is increasing with respect to capital.
4. It satisfies the property of diminishing marginal returns.
5. None of the given choices are correct.
2 The marginal rate of technical substitution equals minus one times the slope of the isoquant.
1. True
2. False
3. Increasing returns to scale can occur because of the difficulty of coordinating a large
enterprise.
1. True
2. False
4. The production function is not closely related to a firm’s or industry’s technology.
1. True
2. False
5. Suppose that the production function is as follows:
Quantity of Quantity of output per year input per year
2 1 5 2 9
3 12 4 14 5
15 6 15 7 14
8
The average product of the input when seven units of the input are used is
1. 7.
2. 15.
3. 15/7.
4. 7/15.
5. None of the given choices are correct.
6. The marginal product equals the average product when the latter is
A.1/2 of its maximum value.
B.1/4 of its maximum value.
C.equal to its maximum value.
D.1 1/2 times its maximum value.
E.None of the given choices are correct
7 Whether there are increasing, decreasing, or constant returns to scale in a particular case
is an empirical question.
A. True
B. False
8. Given Q = 10 K0.5L0.4, where K represents the units of capital and L the hours of labor
employed in production, which of the following is a true statement regarding the marginal
product of labor?
1. It is smaller than the marginal product of capital.
2. It is decreasing with respect to capital.
3. It is increasing with respect to labor.
4. It satisfies the property of diminishing marginal returns.
5. None of the given choices are correct.
9. At the Martin Company, the average product of labor equals 5/L0.5, where L is the
amount of labor employed per day. Thus,
A. labor always is subject to diminishing marginal returns.
B. labor is subject to diminishing marginal returns only when L is greater than five.
C. labor always is not subject to diminishing marginal returns.
D. labor always is not subject to diminishing marginal returns when L is greater than five.
E. None of the given choices are correct.
10. Isoquants are always straight lines.
1. True
2. False
11. If the production function is as given in question 12, the marginal product of the input
begins to decline
1. after three units of input are used.
2. after two units of input are used.
3. after four units of input are used.
4. after seven units of input are used.
5. None of the given choices are correct.
12. If the production function is as given in question 12, the marginal product of the input
when between one and two units of the input is used is
1. two.
2. five.
3. three.
4. four.
5. None of the given choices are correct.
13. If the production function is the same as is given in question 17, which of the following
statements is true?
1. It is consistent with increasing returns to scale.
2. It is consistent with constant returns to scale.
3. It is consistent with decreasing returns to scale.
4. It is inconsistent with the law of diminishing marginal returns.
5. It is consistent with decreasing returns to scale AND it is consistent with the law of
diminishing marginal returns.
14. The law of diminishing marginal returns is inconsistent with increasing returns to scale.
1. True
2. False
15. If the average product of labor equals 10/L, where L is the number of units of labor
employed per day, total output is the same regardless of how much labor is used per day.
1. True
2. False
16. The law of diminishing marginal returns applies to cases where there is a proportional
increase in all inputs.
1. True
2. False
17. Statistical studies of production functions are hampered by the fact that available data
do not always represent technically efficient combinations of inputs and outputs.
1. True
2. False
18. All production functions exhibit constant returns to scale.
1. True
2. False
19. If the production function is as given in question 12, the marginal product of the input
is negative when more than
1. seven units of input are used.
2. six units of input are used.
3. five units of input are used.
4. four units of input are used.
5. None of the given choices are correct.
20. If the production function is the same as is given in question 17 and the inputs were
doubled, output would
1. double.
2. increase by 190 percent.
3. increase by 90 percent.
4. remain unchanged.
5. None of the given choices are correct.
Bottom of Form
Answer:
Chapter 5
1 2 3 4 5 6 7 8 9 10
d True False False c C True D A False
11 12 13 14 15 16 17 18 19 20
C C C False True False True False A C
