Question

1. If some production function Q(L,K) exhibits and increasing return to scale, then the marginal cost of production decreases as output level increases. (a) True (b) False

2. If for some production function Q(L,K) the marginal product of labor and the marginal product of capital both decreases as output level increases, then the marginal cost of production increases as output level increases. (a) True (b) False

3. A firms production function is represented by Q(M,R) = M^3R, MPM = 3M^2R, MPR = M^3, where Q denotes output, M raw materials and R robots. The firm is currently using 6 units of raw materials and 12 robots. According to the MRTS, in order to maintain its output level the firm would need to give up 2 robots if it adds 9 units of raw material. (a) True (b) False

Answer 1

1.

True

Where there is an increasing return to scale, then ATC decreases with increase in output. It means that marginal cost is decreasing with production of each additional unit of output.

2.

True

When MPL and MPK, both are decreasing, then it is setting a decreasing return to scale in the production process. It will increase the ATC with increase in the level of production. So, marginal cost will increase with each additional unit of output.

3.

False

MRTS = MPM/MPR = 3M^2R/M^3

MRTS = 3R/M

So, the given statement is not the correct way to replace raw materials with robots.