Assignment 8

1) In the short run, production is characterized by:

a) All inputs being variable
b) All inputs being fixed
c) At least one input being fixed
d) No fixed inputs
Answer – (c)
2) What does the elasticity of substitution help analyze?
a) How output changes with input prices
b) How easily one input replaces another
c) How demand changes with price
d) How profits change with output
Answer – (b)
3) What does the Marginal Rate of Technical Substitution (MRTS) measure?
a) The rate at which labor can replace capital while keeping output constant
b) The change in output when one input is increased, holding the other constant
c) The ratio of total output to total input
d) The cost of producing one more unit of output
Answer – (a)
4) Let us look at 80 workers who are trying to decide whether to work for one of the two
companies: Company X and Company Y. Assume both companies are equally
appealing. The Marginal Product of Labor (MPL) for both companies is given in the
following table:

No. of workers per firm Company X’s MPL Company Y’s MPL
10 200 110
20 150 80
30 120 60
40 110 50
50 80 40
60 60 20
70 50 10
80 40 0

At a wage rate of $50 per hour, what will be the total demand for workers?
a) 90
b) 100
c) 80
d) 60
Answer – (a)
Workers allocated between companies until the MPLs (and therefore wages) become
equal in both companies. We need to find how workers can be split between the two
 companies so that MPLs are equalized, as workers would naturally move to the
company offering higher MPL (thus higher potential wages). We need to check
various possible splits of the workers so that the marginal product of labour of both
companies are equalized with the wage rate. At (50 in X, 30 in Y),
MPL(X) = 80, MPL(Y) = 60 → MPL(X) > MPL(Y), Workers shift from Y → X. At
(60 in X, 20 in Y), MPL(X) = 60, MPL(Y) = 80 → MPL(Y) > MPL(X), Workers shift
from X → Y. Thus, equilibrium must lie between these points (50-60 workers for X,
20-30 for Y). Equilibrium occurs where MPL(X) = MPL(Y). At 60 workers in X →
MPL = 60. At 30 workers in Y → MPL = 60. At exactly 60 workers in X, MPL(X) =
60. At exactly 30 workers in Y, MPL(Y) = 60. Total workers demanded = 90.
5) Let us look at 80 workers who are trying to decide whether to work for one of the two
companies: Company X and Company Y. Assume both companies are equally
appealing. The Marginal Product of Labor (MPL) for both companies is given in the
following table:

No. of workers per firm Company X’s MPL Company Y’s MPL
10 200 110
20 150 80
30 120 60
40 110 50
50 80 40
60 60 20
70 50 10
80 40 0

Suppose 10 more workers come to the town. What will be the wage rate now?
a) 65
b) 75
c) 70
d) 60
Answer – (d)
Now, the number of workers has increased from 80 to 90 (80 original workers + 10
new workers). Equilibrium occurs when workers are allocated between the two firms
such that MPL at both firms is equal. Check possible distributions summing to 90
workers:
Workers in X MPL(X) Workers in Y MPL(Y) MPL
comparison
60 60 30 60 MPL equal at
60
70 50 20 80 MPL(Y) >
MPL(X)
50 80 40 50 MPL(X) >
MPL(Y)
 Clearly, exactly 60 workers in Company X and 30 workers in Company Y results in
equal MPL (60). At equilibrium, workers are paid equal to their marginal product of
labor (MPL). Therefore, equilibrium wage rate = $60/hour.
6) A firm produces output using two inputs: labor (𝐿) and capital (𝐾). The production
function is:
𝑄 = 10𝐿0⋅5 𝐾 0⋅5
Where, Q is the output produced, L is the units of labor, and K is the units of capital
employed. What will be the Marginal Rate of Technical Substitution of labor for
capital (MRTSL,K)?
a) −𝐾/𝐿
2𝐾
b) −√ 𝐿
𝐾
c) −√3𝐿
5𝐾
d) −√ 𝐿

Answer – (a)

7) A firm produces output using two inputs: labor (𝐿) and capital (𝐾). The production
function is:
𝑄 = 10𝐿0⋅5 𝐾 0⋅5
Where, Q is the output produced, L is the units of labor, and K is the units of capital
employed. What will be the Marginal Rate of Technical Substitution of capital for
labor (MRTSK,L)?
a) −𝐾/𝐿
7𝐾
b) −√ 𝐿
c) −𝐿/𝐾
3𝐿
d) −√5𝐾

Answer – (c)
8) Which of the following statements correctly describes the relationship between the
Average Product of Labor (APL) and the Marginal Product of Labor (MPL)?
a) APL is always greater than MPL
b) When MPL is greater than APL, APL is increasing
c) When MPL is less than APL, APL is increasing
d) MPL and APL are unrelated concepts in production theory
Answer – (b)
9) A firm’s production function is given by 𝑄 = 𝐴𝐾 𝛼 𝐿𝛽 , where 𝑄 is output, 𝐾 is capital,
L is labor, and A is a constant. If the firm doubles both capital and labor, under which
of the following conditions will the firm experience increasing returns to scale (IRS)?
a) 𝛼 + 𝛽 < 1
b) 𝛼 + 𝛽 = 1
c) 𝛼 + 𝛽 > 1
d) Returns to scale cannot be determined from the given function
Answer – (c)
10) A small bakery hires workers to bake cakes. Initially, as more workers are hired, the
bakery's output increases at an increasing rate. However, after a certain point, adding
more workers leads to smaller increases in output because they start getting in each
other’s way due to limited oven space. This situation is an example of ……….
a) Economies of scale
b) The Law of Diminishing Marginal Returns
c) Increasing Returns to Scale
d) The Law of Demand
Answer – (b)