Case Study 5: Production

A Written Analysis of a Case Presented to MR. NASH REGINIO Faculty-in-charge, College of Governance and Business University of Southeastern Philippines Bo. Obrero, Davao City

In Partial Fulfillment of the Requirements For the course, Economics 101, Introduction to Microeconomics

Group 3 BA 3-2

February 18, 2013

1. The following table shows the amount of total output produced from various combinations of labor and capital.

Units of Capital Units of Labor 1 2 3 4 5 1 50 110 150 170 160 2 120 260 360 430 480 3 160 360 510 630 710 4 180 390 560 690 790

a.) Calculate the marginal product of labor when the capital is held constant at two units. When the average product of labor is increasing, what is the relationship between AP and MP? What about when the APL is decreasing?

Answer: Total Output (q) 120 260 360 430 480 Average Product (q/L) 120 130 120 107.5 96 Marginal Product (q/L) 140 100 70 50

Units of Labor (L) 1 2 3 4 5

Units of Capital (K) 1 2 3 4

*Marginal Product=

=140

As the average product of labor is increasing, the marginal product is greater than the average product and less than when the average product of labor is decreasing. That is, if APL , then MPL APL; if APL , then MPL APL b.) Calculate the marginal product of labor for each level of capital stock. How does the marginal product for the second unit of labor change as the capital stock increases? Why?

Answer: Units of Labor (L) 1 2 3 4 5 Units of Labor (L) 1 2 3 4 5 1 60 40 20 -10 1 50 55 50 42.5 32

Average Product (q/L) 2 3 120 160 130 180 120 170 107.5 157.5 96 142

4 180 195 186.6667 172.5 158

Marginal Product 2 140 100 70 50

(q/L) 3 200 150 120 80

4 210 170 130 100

As the capital stock increases, the marginal product of the second unit of labor continues to rise. Because an increase in the amount of capital allows greater output and become more productive in the future so it will push the marginal product higher.

2. Graph the short-run product curves for each of the following production functions if K is fixed at K=4? a) Q=f(K,L)=2K+3L Answer: K=4, Let L=1, 2, 3, 4, 5 Q=2K+3L=2(4) +3(1) =11 (same process for L=2, 3, 4, 5) L 0 1 2 3 4 5 K 4 4 4 4 4 4 TO 0 11 14 17 20 23 APL 11 7 5.666667 5 4.6 MPL 11 3 3 3 3
12 10 8 6 4 2 0 1 2 3 4 5

APL MPL -

Total Output
25 20 15 10 5 0 1 2 3 4 5 6 Total Output

Y axis=Output ; X axis= Labor

b) Q=f(K,L)= K L Answer: K=4, Let L=1, 2, 3, 4, 5 Q= K L= 4 1=2 (same process for L=2, 3, 4, 5)

Labor 0 1 2 3 4 5
2.5 2 1.5 1 0.5 0 1 2 3

Capital 4 4 4 4 4 4

Total Output 0 2 2.83 3.46 4 4.47

APL 2 1.415 1.153333 1 0.894

MPL 2 0.83 0.63 0.54 0.47

Total Output
5 4 APL MPL 3 2 1 0 4 5 1 2 3 4 5 6 Total Output

Y axis=Output ; X axis= Labor

c) Q=f(K,L)=K2L2 Answer: K=4, Let L=1, 2, 3, 4, 5 Q=K2L2= (4)2(1)2=16 (same process for L=2, 3, 4, 5)

Labor 0 1 2 3 4 5
200 150 100 50 0 1 2 3

Capital 4 4 4 4 4 4

Total Output 0 16 64 144 256 400

APL 16 32 48 64 80

MPL 16 48 80 112 144

Total Output
APL MPL 500 400 300 200 100 0 1 2 3 4 5 6

Total Output

Y axis=Output ; X axis= Labor 3. Suppose you own a fishing fleet consisting of a given number of boats, and can send your boats in whatever numbers you wish to either of two ends of an extremely wide lake, east or west, under your current allocation of boats, the ones fishing at the east end return daily with 100 pounds of fish each, while those in the west return daily with 120 each. The relationship between the number of boats sent to each end and the number of pounds caught per boat are given in the table below the fish population at each end of the lake are completely independent, and your current yields can be sustained indefinitely. Suppose further that you have your boats in your fleet, and that two currently fish the east and while the other two fish the west end AP, TP, and MP (lb/day) for two fishing areas East End # of Boats AP TP MP AP 0 0 0 0 1 100 100 100 130 2 100 200 100 120 3 100 300 100 110 4 100 400 100 100 Should you move one of your boats from the east end to the west end? West End TP 0 130 240 330 400

MP 130 110 90 70

Answer: NO, because the MP and AP of west end is decreasing with increasing TP while the MP and AP of east end is constant with increasing TP.