Below is a graph showing the production function for coffee houses. It shows how

Question

Below is a graph showing the production function for coffee houses. It shows how output per worker increases as the amount of capital each worker has to use increases, other things being equal. The owners of Joe's Java and Cathy's Coffee are each considering adding another espresso machine. Joe's is currently operating at Point A, where the new machine would move Joe's to Point B. Cathy's is operating at Point C and the new machine would move them to Point D. Using this information, which of the following statements must be true? Cathy's Coffee is more profitable than Joe's Java. Cathy's is experiencing more diminishing returns to capital than Joe's. Joe will buy another espresso machine. Cathy's Coffee will see a larger increase in output per worker than Joe's Java. Which of the following is NOT held constant as we move along the curve from the left to the right? The amount of capital used in relation to the number of workers The level of technology the capital employs O The amount of natural resources available for the workers to use The skill of the workers

Explanation / Answer

Ans 1 (B) Dimishing returns, because increase in inputs is less than increase in output for Cathy's production.

Ans 2. (A)

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