Economic Analysis: Exercise Chapter 7 to 12



Economic Analysis: Exercise Chapter 7 to 12

Chapter 7

Answer of problem number 1 (Case of Deep mining Company)

complete the given table

No. of workers (Labor Inputs = L)

Total Product of labor (TPL)

Marginal Product of labor (MPL)

Average Product of Labor (APL)

1

3

0

3

2

6

3

2

3

16

10

5.33

4

29

13

7.25

5

43

14

8.6

6

55

12

9.16

7

58

3

8.28

8

60

2

7.5

9

59

-1

6.5

10

56

-3

5.6

Plot TPL, MPL and APL

Total product is a curve that is used by economists to illustrate a graphical representation of relationship between firm's production and its cost in short run. Total product labor curve helps us in understanding the relationship between the total product produced and the variable cost. From the graph we can see that initially total product curve is increasing till labor inputs of 8 due to increasing marginal returns, but after this point total product curve is declining duce to decreasing marginal returns (McGuigan, 2012).

Marginal product of labor curve describes the additional cost a firm has to bear after utilizing an additional unit of labor, marginal product of labor. Marginal product of labor defines the change in the output produced by adding an additional unit of an employee. In other words one can say that it is the first derivative of total production function or slope of production function.

Average product of labor describes how much production takes place after utilizing each unit of labor. It can be calculated by dividing total product with number of units. Average product of labor starts declining from the Point where marginal product of labor touches average product of labor (Drury, 2012).

Determination of three levels boundaries

In the field of economics, a production function of a company is divided into three stages or phases. Each stage is characterized by different properties. During first stage, average product of labor and marginal product of labor are rising. At this stage marginal product (MP) is always greater than average product (AP). First stage ends at the point where marginal product starts to decline after reaching its maximum. In the example of Deep Mining Company. In second stage, average product of labor (APL) starts falling after touching its maximum point, and marginal product (MP) become zero. In third stage, marginal product (MP) becomes negative while average product continues to declines and remains positive (Conkling, 2011).

In given example first stage starts from point where labor input is 1 while it ends at point where labor input is 6.5. First stage ends where marginal product crosses or touches the average product of labor. Second stage starts after the point where labor input is greater than 6.5 and ends at the e point where labor input is 8.5. In third stage marginal product of labor become negative (Barron, Perlack, Boland, 2011).

Answer of problem number 6 (Short Run Production Function)

Given function Q = 10L - 0.5L2

Identify the Marginal Revenue Production Function

We need to find revenue function first before finding the marginal revenue function. Marginal revenue function can be calculated by taking the first derivative of revenue function. Marginal revenue function explains how much a revenue changes or increases with the sale of an additional ...