Production Function (16 problems)

Business managers often talk of “spreading the overhead” and often refer to the “efficiency of mass production”. Drawing on production theory, briefly explain, using economic terminology, what each of the following phrases means:

b. Efficiency of mass production.

Which of the following industries exhibit economies of scale? Explain giving reasons.

a) Financial services

d) Electric power generation

f) Software development

After two quarters of increasing levels of production, the CEO of Canadian Fabrication & Design was upset to learn that, during this time of expansion, productivity of the newly hired sheet metal workers declined with each new worker hired. Believing that the new workers were either lazy or ineffectively supervised (or possibly both), the CEO instructed the shop foreman to “crack down” on the new workers to bring their productivity levels up.

a. Explain carefully in terms of production theory why it might be that no amount of

“cracking down” can increase worker productivity at CF&D

b. Provide an alternative to cracking down as a means of increasing the production of the sheet metal workers.

Which of the following industries exhibit economies of scale? Explain giving reasons.

a) Financial services

d) Electric power generation

f) Software development

Gamma Corporation, one of the firms that retains you as a financial analyst, is considering buying out Beta Corporation, a small manufacturing firm that is now barely operating at a profit. You recommend the buyout because you believe that new management could substantially reduce production costs, and thereby increase profit to a quite attractive level. You collect the following product information in order to convince the CEO at Gamma corporation that Beta is indeed operating inefficiently:

MPL = 10, = $20

MPK = 15, = $15

Explain how these data provide evidence of inefficiency. How could the new manager of Beta Corporation improve efficiency?

Suppose you are President and CEO of a sports franchise. The stadium has 40,000 seats. The demand for tickets far exceeds the number of seats available. An expansion program is in the offing.

a) What are some of the decisions you must make in the short-run?

b) What are the fixed factors of production? What are the variable factors of production?

c) What are the long-run decisions you must make? Explain.

The El Dorado Star is the only newspaper in El Dorado, New Mexico. Certainly the Star competes with The Wall Street Journal, USA Today, and The New York Times for national news reporting, but the Star offers readers stories of local interest, such as local news, weather, sporting events, and so on. The El Dorado Star faces the revenue and cost schedules shown in the table that follows: Important: Be sure to use marginal analysis (calculate MR and MC at each level of output) show all your steps.

2. How much profit or loss will the Star earn?

3. Graph the marginal revenue and marginal cost curves. Do these curves support your answer to part a? (Hint: Be sure to plot the values of MR and SMC in the middle of the intervals over which they are computed).

4. What is total fixed cost for the El Dorado Star? If total fixed cost increase to $5,000, how many papers should be printed and sold in the short run? What should the owners of the Star do in the long run?

Suppose you are President and CEO of a sports franchise. The stadium has 40,000 seats. The demand for tickets far exceeds the number of seats available. An expansion program is in the offing.

a) What are some of the decisions you must make in the short-run?

b) What are the fixed factors of production? What are the variable factors of production?

c) What are the long-run decisions you must make? Explain.

Complete following table by calculating marginal product and average product from the data given

Plot the total, marginal, and average products and explain in detail the relationship between each pair of curves. Explain why marginal product first rises, then declines, and ultimately becomes negative. What bearing does the law of diminishing returns have on short-run costs? Be specific. "When marginal product is rising, marginal cost is falling. When marginal product is diminishing, marginal cost is rising." Illustrate and explain graphically.

By the end of the 20th century it was observed that South Korea had evolved from a predominantly agricultural economy to a predominantly industrial state. However agricultural output has increased. Given what you know about production functions and production technology explain this paradox.

By the end of the 20th century it was observed that South Korea had evolved from a predominantly agricultural economy to a predominantly industrial state. However agricultural output has increased. Given what you know about production functions and production technology explain this paradox.

Farmer Jackson has a 50 acre plot which can produce cabbages and soybeans. He sells them to the townsfolk who live in the vicinity. The following is a production possibility table for the cabbages and the soybeans.

a) What is the cost of one more ton of soybean if the economy is presently at point B? What is the cost of one more ton of soybeans if the economy is presently at point C? How do these answers illustrate the law of increasing opportunity cost?

b) What is the cost of one more ton of cabbages if the economy is at point D?

c) How would it be possible for Farmer Jackson to produce 1000 tons of cabbage and 200 tons of soybeans at the same time? What might cause him to produce a combined output of 300 tons of cabbages and 100 tons of soybeans?

d) What steps must Farmer Jackson take in order to expand his PPF (Production Possibility Frontier)?