Page 119 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 7. Under decreasing return to scale increase in output is ..................... than proportionate to
the increase in input.
8. Increasing return to scale are due to ..................... and/or managerial indivisibilities.
9. Technical indivisibilities cause ..................... returns to scale.
10. In the long run, output can be ..................... by increasing the scale of operations.

8.6 Review Questions

1. Comment on the role of specialization in increasing returns to scale.
2. Examine the importance of the law of diminishing returns. What do you think to be its
causes and effects?

3. Are diminishing returns to a factor inevitable? Give reasons.
4. From the information given below calculate the average and marginal product of labour.
Land (acres) : 5 5 5 5 5 5 5 5
Labour (number of men) : 0 1 2 3 4 5 6 7
Total product (kg.) : 0 3 8 12 15 17 17 16
5. Give your comment on second stage of production.

6. Can labour productivity never increase when total production is falling? Discuss.
7. Analyse the day to day situations around you and provide evidence against the hypothesis
of constant returns to scale.

8. Suppose the production function for widgets has the form
Q = q(K,L)= 50K L 0.7
0.3
Where q is the quantity of tools per day, K is the quantity of capital input, and L is the
quantity of labor input per day.

(a) Does this production function have increasing, constant, or decreasing returns
scale?
(b) What is the marginal product of capital when the firm is suing 5 units of capital and

1 unit of labour?
(c) What is the marginal product labor when the firm is using 5 units of labor and 1 unit

of capital?
(d) What is the total output when the firm is using 5 units of capital and 5 units of labor?

Draw an isoquant representing this level of output.
(e) What additional information would you need to determine which of the combinations
on your isoquant is “best”? That is what would you want to know to choose the best
combination of labor and capital to use in your production process?

9. “Technical and/or managerial indivisibilities cause increasing return to scale.” Give your
opinion.
10. Discuss returns to scale with the help of examples.

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