Answer to Question #202706 in Microeconomics for Ishita

Question

state if the statement is true, false or uncertain.

1.     If a firm has production function q = L^0.3K^0.7   and input prices are constant then the marginal cost is less than the average cost.
2.    If a firm has a production function q = L^0.4K^0.8 then the marginal cost is equal to the average cost..
3.     In case a production function is subject to constant returns to scale , diminishing marginal productivity implies that more of one input raises the marginal product of the other input.
4.     If over time the ratio of expenditure of labour to capital rises, then it must be the case that the ratio of units of labor to capital used in production also rises.

Answer 1

1. True - given that the input prices are constant, average cost will decrease as the quantity produced is increased. When average cost declines, Marginal cost will tend to be less than the average cost .
2. False - this is because the only possible point at which marginal cost will be equal to average cost is the minimum point or the break-even point and not through the entire production period.
3. True - this is because diminishing marginal productivity helps in improving inputs for increased production and profitability. Under this case when an advantage is gained in a factor of production, the productivity gained from each subsequent unit will only increase marginally from one unit to the next. This is only when production is under constant returns to scale.
4. Uncertain - the statement given is uncertain because rise in the ratio of units of labor to capital may or may not necessarily be determined by the rise in the ratio of expenditure of labor to capital. A rise in expenditure may mean that more workers have been employed thus increasing the cost to be incurred in wage payments , or this may also mean that the number of workers has remained the same but the wages have been increased.