Exam 7: The Production Process: the Behavior of Profit-Maximizing Firms

Using the table below calculate the marginal product and the average product. Show where diminishing marginal productivity sets in.

If marginal product is decreasing what can we say about what is happening to average product? Explain.

What is an isoquant?

A corporate executive makes the following statement - "The company must keep hiring more workers up to the point where the marginal productivity of the last worker we hire is zero. This way we can maximize the total productivity of the firm." Critically evaluate this statement. Also comment on whether this is the correct objective function for the firm.

Suppose a manager of a company is told by his staff that marginal productivity has risen above the average productivity over the last six months of operation. What can this manager conclude is happening to the overall average productivity of the company? Explain.

What are the three decisions that all firms must make?

Your friend Harry has quit his $20,000-a-year job to start a business that rents fishing boats. He asks you to lend him $50,000 and agrees to pay you a 10% return on your $50,000 if he earns a profit. During the first year Harry's total revenue is $120,000 and his total cost for equipment and supplies are $100,000. Harry tells you that he cannot pay you any interest this year because he did not earn a profit. Is your friend Harry trying to cheat you?

Wally's Widgets currently hires 8 workers. The average product of labor is 15 widgets per day, and the marginal product of a 9th worker is expected to be 13 widgets per day. If the firm hires the 9th worker, what will happen to the average product of labor? Explain.

Explain how it is possible for marginal product to fall while average product is rising?

Assume the marginal product for a particular good is constant. Describe the shape of the total product function that would accompany it.

Suppose your neighbor owns a restaurant and boasts that he is able to turn a handsome accounting profit because of his low labor costs. He attributes this to the fact that he uses his sons and daughters as cooks and waiters. His point is that he offers them below-market wages. How would you respond to your neighbor's statement? What would you tell him to expect as his children continue to work for him while they are in college and beyond?

Barney's Beds currently hires 14 workers. The average product of labor is 2 beds per day, and the marginal product of a 15th worker is expected to be three beds per day. If the firm hires the 15th worker, what will happen to the average product of labor? Explain.

As a manager of a dry-cleaning establishment, you estimate that the total product of labor used to clean shirts varies according to the following data: Fill in the table above.

Using an example, explain the difference between a labor-intensive technology and a capital-intensive technology.

Why might certain industries have a long run and a short run that is not separated by very much time?

What is the relationship between the marginal product curve and the total product curve?

Use the two graphs below to explain the relationship between total product and marginal product.

Define the normal rate of return. If a business has fairly steady revenues and the future looks secure, what should the normal rate of return equal? Why?

What is a firm?

How does a firm measure its profit?