Question
a) Production functions show the highest output that a firm can produce for every specified combination of inputs, but why do we distinguish between short
a) Production functions show the highest output that a firm can produce for every
specified combination of inputs, but why do we distinguish between short run and
long run production functions?
Suppose the production function of a company in the short run can be explained by the
function: q = f (v) where q = output and v = input. Assume a diminishing marginal product
for the input.
b) What guidelines will this provide for how marginal cost change as production
increase in the short run?
Suppose in the long run that the production function of the company can be explained by the
function: q = F (K, L) where q = output, K = capital and L = labour.
c) Explain by using the terms isoquant and isocost, the criteria for the optimal
combination of K and L.
d) How can you use the concept from c) to explain how the optimal solution change if
the price of labour (w) increase provided that the quantity produced shall be
unchanged?
e) Use the same concept to explain why more flexibility in the long run can reduce the
cost of production.
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