The law of diminishing marginal product is an essential assumption in our model of how firms...
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The law of diminishing marginal product is an essential assumption in our model of how firms behave, but is it realistic? Imagine a farm that is one acre in size. This farm uses two inputs: land and workers. If this farm did not experience diminishing marginal product, then would it be possible (according to our model) for this farm to grow all of the world's food? 2. In the short-run, economists believe that workers are paid their value of marginal product. Imagine a worker in a car factory in Southern Ontario where there are many car factories in operation. Explain how each of the following scenarios might impact how much the worker is paid, and why. a) (5 marks) The price of cars goes up. b) (5 marks) The factory purchases new machines which increases how quickly a new car can be built. c) (5 marks) All the other car factories in Southern Ontario shutdown, so there is just one remaining. d) (5 marks) A tax is placed on the purchase of new cars. 3. (10 marks) Imagine a firm that is trying to maximize its profits in the long run by using two inputs, labour (factor 1) and capital (factor 2). Imagine they found the following condition held, where MP is marginal product and w is the cost of that particular factor. MP2 W2 What would you recommend that this firm do in order to maximize long-run profit? MP₁ W1 4. Draw an isoquant/isocost diagram that shows the following scenario. a) (5 marks) A firm using 10 units of both inputs to produce an output of 100. Label this point A. b) (5 marks) Suppose the price of input 1 (the horizontal axis input) increases. Draw a new isocost that still allows the firm to produce 100 units of output. Label this point B. Indicate clearly what happened to the use of input 1 and 2. Will it cost more for the firm to produce at point B or at point A and why? The law of diminishing marginal product is an essential assumption in our model of how firms behave, but is it realistic? Imagine a farm that is one acre in size. This farm uses two inputs: land and workers. If this farm did not experience diminishing marginal product, then would it be possible (according to our model) for this farm to grow all of the world's food? 2. In the short-run, economists believe that workers are paid their value of marginal product. Imagine a worker in a car factory in Southern Ontario where there are many car factories in operation. Explain how each of the following scenarios might impact how much the worker is paid, and why. a) (5 marks) The price of cars goes up. b) (5 marks) The factory purchases new machines which increases how quickly a new car can be built. c) (5 marks) All the other car factories in Southern Ontario shutdown, so there is just one remaining. d) (5 marks) A tax is placed on the purchase of new cars. 3. (10 marks) Imagine a firm that is trying to maximize its profits in the long run by using two inputs, labour (factor 1) and capital (factor 2). Imagine they found the following condition held, where MP is marginal product and w is the cost of that particular factor. MP2 W2 What would you recommend that this firm do in order to maximize long-run profit? MP₁ W1 4. Draw an isoquant/isocost diagram that shows the following scenario. a) (5 marks) A firm using 10 units of both inputs to produce an output of 100. Label this point A. b) (5 marks) Suppose the price of input 1 (the horizontal axis input) increases. Draw a new isocost that still allows the firm to produce 100 units of output. Label this point B. Indicate clearly what happened to the use of input 1 and 2. Will it cost more for the firm to produce at point B or at point A and why?
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1 The law of diminishing marginal product is a realistic assumption in our model of how firms behave Even though a farm may be only one acre in size it is unlikely that it could grow all of the worlds ... View the full answer
Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
Posted Date:
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