Page 104 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 7: Production Theory

An expansion path is formally defined as the set of combinations of capital and labour that Notes
meet the effi ciency condition.

7.8 Keywords

Inputs: Resources used in the production of goods and services.
Isoquants: These are a geometric representation of the production function.
Kinked isoquant: This assumes limited substitutability of capital and labour.

Marginal rate of technical substitution: It is defined as the number of units of input K that a
producer is willing to sacrifice for an additional unit for L.

Marginal revenue product of labor: Marginal product of labour times the marginal revenue from
the sale of extra output produced.
Production: Transformation of inputs into output.

7.9 Self Assessment

Fill in the blanks:
1. Production refers to the .............................. of inputs or resources into output of goods and
services.
2. .............................. are the resources used in the production of goods and services and
are generally classified into three broad categories – labour, capital and land or natural

resources.
3. .............................. are those that can be varied easily and on very short notice.
4. The time period during which at least one input is fixed is called the .............................. .

5. Mathematically, the production function can also be shown as: .............................. .
6. The MPP of factor is a change in .............. resulting from a change in a factor of
production.
7. Linear isoquant assumes ..................... substitutability of factors of production.

8. Kinked isoquant assumes ..................... substitutability of factors of production.
9. Kinked isoquant assumes ..................... substitutability of capital and labour.
10. ..................... is the slope of a given isoquant.

7.10 Review Questions

1. Calculate the total cost of production, if only two inputs are used- labour and capital.
Consider the following data: Cost of labour = ` 50/unit, price of capital = ` 500, number of
labour used = 35 and capital used 45.

2. Show that the different relative input prices would defi ne an isocost line with a different
slope.
3. Show that the ratio of marginal products is equal to the ratio of price.

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