Production

Question 1

Most common production function equation

Answer 1

Question 1

What is a variable input

Answer 1

An input that can be varied in the short run

Question 2

How is capital a productivity driver

Answer 2

• It enhances the productivity of labour
• EG for Q=2KL, 3 capital leads to 6Q with 1 worker whereas with 1 capital, 3 workers are needed to produce 6Q

Question 3

What does improvements in technology do to production function curve

Answer 3

Shift up

Question 4

Average product equation

Answer 4

Q/L

Question 5

What does this illustrate

Answer 5

Law of diminishing returns, if you add a variable input to fixed input, the output increase from this increase in input will eventually decline

Question 6

Describe the relationship between marginal product and total product

Answer 6

• When MP is above AP, the AP must also be rising
• WHen MP is below AP, AP must be falling

Question 7

When is the average product maximised

Answer 7

When AP and MP intersect

Question 8

Who analysed diminishing returns to analyse the effect of population growth

Answer 8

Malthus

Question 9

Using the diminishing average product of labour, explain the Malthus model

Answer 9

• As living standards increase, the population increases due to falling death rates (birth rate is constant)
• The law of diminishing returns highlights that if you increase the population so there are more farmers added to fixed land , the average return that each farmer gets will fall
• Thus, as the population rises, living standards fall

Question 10

Was Malthus’ theory correct

Answer 10

• His theory seems to fit much of pre-industrial history
• Although his prediction of stagnation was falsified by 200 years of subsequent history

Question 11

3 Key factors why malthus was wrong

Answer 11

• Tech progress has allowed us to outstrip pop growth
• Industrialisation also counters diminishing returns- capital is variable in LR
• People may control family size/ fertility rates fell

Question 13

What is marginal rate of technical substitution

Answer 13

The rate at which one input can be exchanged for another without altering total output

Question 14

How are isoquants of perfect complements and subs shaped

Answer 14

• Complemens= right angle
• Subs- Straight line from x to y axis

Question 15

What is steeper, a capital or labour intensive isoquant and why

Answer 15

Labour intensive as you are willing to sacrifice more capital for labour

Question 16

What is the distinction between decreasing returns to scale and diminishing returns

Answer 16

• Returns to scale is when all inputs are varied by a given proportion whereas the other is about only one being variable the rest fixed