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Solutions To Exercises-Production Function

The document contains exercises related to production functions, focusing on calculating marginal products and analyzing returns to scale. It includes specific production functions, calculations for marginal products of capital and labor, and the effects of changes in inputs on output and rental prices. The exercises also explore constant returns to scale and the impact of variations in productivity and input levels on marginal productivity.

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Eya Ben Bdira
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35 views3 pages

Solutions To Exercises-Production Function

The document contains exercises related to production functions, focusing on calculating marginal products and analyzing returns to scale. It includes specific production functions, calculations for marginal products of capital and labor, and the effects of changes in inputs on output and rental prices. The exercises also explore constant returns to scale and the impact of variations in productivity and input levels on marginal productivity.

Uploaded by

Eya Ben Bdira
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Exercises – Production Function

Exercise 1

Consider the following production function:

Y = 100 K0.8L0.2

a. Starting with a capital input of 4 and a labor input of 49, show that the marginal
product of labor and the marginal product of capital are both decreasing.

b. Does this production function exhibit increasing, decreasing, or constant returns to


scale?

Exercise 2

Consider the following production function:

Y = 2 K1/4L3/4

a. Find the expressions for MPK and MPL as functions of K and L.

b. How does an increase in labor by 20% affect total output?

c. How does an increase in capital by 20% affect the real rental price of capital
(R/P)? Hint: recall that R/P is equal to MPK.

Exercise 3:

Consider the following production function:

Y = A Kb L1-b

Where Y is output; K is capital; L is the number of workers, A is Total Factor Productivity


and b = 0.4.

1. Prove that this function has Constant Returns to Scale (CRS).

2. Derive the expression for the Marginal Product of Capital (MPK).

3. Derive the expression for the Marginal Product of Labor (MPL).

4. Analyze how the marginal productivity of labor changes when:

a. A increases by 10%
b. K increases by 10%
c. L increases by 10%
d. b falls from 0.4 to 0.3

1
Solutions

Exercise 1

a.

K Q MPK
4 660.21 --
5 789.25 129.04
6 913.19 123.94
7 1,033.04 119.85

MPK decreases as K increases.

L Q MPL
49 660.21 --
50 662.89 2.68
51 665.52 2.63
52 668.11 2.59

MPL decreases as L increases.

b. F(zK, zL) = 100(zK)0.8(zL)0.2 = 100 z K0.8 L0.2 = zY


This production function has Constant Returns to Scale (CRS)

Exercise 2

∂Y
a. MPK = = 0.5K −3/4 L3/4
∂K

∂Y
MPL = = 1.5K1/4 L−1/4
∂L
Y2
b. = (1.2)3/4 = 1.15. The total output will increase by 15%.
Y1

(R2 /P2 ) MPK2 0.5(1.2K)−3/4 L3/4


c. = = = (1.2)−3/4 = 0.87
(R1 /P1 ) MPK1 0.5K−3/4 L3/4
So the rental price of capital will decrease by 13%.

2
Exercise 3

1. F(zK, zL) = A(zK)0.4 (zL)0.6 = zAK 0.4 L0.6 = zF(K, L)

so this function has CRS.


∂Y
2. MPK = = 0.4AK −0.6 L0.6
∂K
∂Y
3. MPL = = 0.6AK 0.4 L−0.4
∂L
MPL 0.6∗1.1AK0.4 L−0.4
4. a. MPL2 = = 1.1 so the MPL will increase by 10%
1 0.6AK0.4 L−0.4
MPL 0.6A(1.1K)0.4 L−0.4
b. MPL2 = = (1.1)0.4 = 1.04 so the MPL will increase by 4%
1 0.6AK0.4 L−0.4
MPL 0.6AK0.4 (1.1L)−0.4
c. MPL2 = = (1.1)−0.4 = 0.96 so the MPL will decrease by 4%
1 0.6AK0.4 L−0.4
MPL 0.7AK0.3 L−0.3 0.7 L 0.1 K −0.1
d. MPL2 = 0.6AK0.4L−0.4 = 0.6 (K) = 1.17 ( L )
1
MPL2 𝑲
= 1 if = 4.67
MPL1 𝑳
𝑲 𝑲
Then, MPL increases if > 4.67 and decreases if < 4.67
𝑳 𝑳

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