Question

2. Consider Prunella in (1). In the long-run, she can adjust both inputs.
(a) Does this production function exhibit increasing returns to scale? Explain your answer.
(b) Suppose that the wage rate is the same as in (1) and the rental rate for land is $5. If
she is going to produce 120 peaches, how many units of labour and land is she going to
choose?

PS1. Prunella raises peaches. L is the number of units of labour she uses and T is the number of
units of land she uses, her output (bushels of peaches), denoted as Q, is given by
Q =L*T^(1/2)
(a) Consider the short-run decision, in which she has a xed amount of land (T = 9). Does
this production function exhibit the diminishing marginal return on the labour input?
Explain your answer.
(b) If she uses 4 units of labour, then what is the marginal product of labour? What does
it mean?
(c) If she can sell peaches at the price of $5, and she has to pay the wage rate at $4, then
how many units of labour does she employ?

Answer 1