A. The following table shows data on the amount of total output produced from va

Question

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

1

Based on the values of this table answer the following questions:

1. If capital is fixed at two units, what is the marginal product of the fourth unit of labor?

2. If capital is fixed at one unit, diminishing returns begin with the:

3. If labor is fixed at three units, how much does the third unit of capital add to total output?

4. What is the marginal rate of technical substitution when the firm uses two units of capital and three units of labor.

Units of Units of capital Labor 1 2 3

1

80 100 120 2 180 220 260 3 270 330 390 4 340 420 500 5 390 490 590 6 410 530 650

Explanation / Answer

Question 1

If capital is fixed at two units then,

Total output when 3 units of labor is used (TP3) = 330 units

Total output when 4 units of labor is used (TP4) = 420 units

Marginal product of the 4th unit of labor = TP4 - TP3 = 420 - 330 = 90 units

The marginal product of the 4th unit of labor is 90 units.

Question 2

Following is the required table -

Units of Capital

1

Marginal product starts decreasing from the employment of 3rd worker.

This indicates beginning of diminishing returns.

So,

If capital is fixed at one unit, diminishing return begin with the employment of 3rd unit of labor.

Question 3

Combination of 3 units of labor and 2 units of capital produce output of 330 units.

Combination of 3 units of labor and 3 units of capital produce output of 390 units.

Marginal product of the third unit of capital = 390 - 330 = 60 units

The third unit of capital adds 60 units to total output.

Question 4

When firm use two units of capital and two units of labor, output is 220 units.

When firm use two units of capital and three units of labor, output is 330 units.

Marginal product of third unit of labor, MP3 = 330 - 220 = 110 units

When firm use one unit of capital and three units of labor, output is 270 units.

When firm use two units of capital and three units of labor, output is 330 units.

Marginal product of 2nd unit of capital, MP2 = 330 - 270 = 60 units

Calculate marginal rate of technical substitution -

MRTS = Marginal product of third unit of labor/Marginal product of 2nd unit of capital = 110/60 = 1.83

The marginal rate of technical substitution when the firm uses two units of capital and three units of labor is 1.83

Units of Labor

Units of Capital

1

Marginal Product 1 80 80 2 180 100 3 270 90 4 340 70 5 390 50 6 410 20

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