Homework for Production, Fast Track MBA, Fall 2004, Dr. Millner

Name (Please print): ______

Honor Policy: This assignment is "pledged" and "open book". You may use calculators, computers, notes and books while completing the assignment. However, you may not receive assistance from anyone else; you may not look at another student's calculator, notes, book, or test nor act in a manner that allows another student to look easily at your calculator, notes, book, or test.). You may not talk with anyone other than the instructor about the assignment until after the due date.

"On my honor, I have neither given nor received aid on this assignment."

Signature: ______

Put your answers to each question on separate 8.5x11 sheets of paper. One question, drawn at random, will be collected for grading. You should be prepared to sign a pledge that you completed the work independently, without assistance from anyone else including members of your team. Good answers will earn 100 points; incorrect answers that show good effort will receive 80 points. All other answers will earn 50 points.

  1. Labor is the only variable input for Smyna-Goshen Inc. in its Free-Range Chicken Harvesting business. Labor productivity is given in the following table.

Hours of L / Total Output / Average Product / Marginal
Product / Marginal Revenue Product
0 / 0 / -- / -- / --
1 / 2
2 / 7
3 / 11
4 / 14
5 / 16
6 / 17
  1. Assuming that Smyna_Goshen sells each chicken harvested for $5, complete the bottom right portion of the table.
  2. At what point does the firm begin to encounter diminishing marginal returns?
  3. If labor costs $11 per hour, what level of employment maximizes profit?
  4. If the price rises from $5 to $6 and the wage rate remains constant at $11, what level of employment maximizes profit?

  1. You have been hired as a consultant to a firm that uses two inputs, capital and labor. The firm can hire as much labor as it wants at $15 per hour and rent as much capital as it wants at $30 per hour. The firm currently employs 100 hours of labor and 200 hours of capital and produces 5,000 units of output which it sells in a competitive market for $2 per unit. Analysis indicates that, at current employment levels, the marginal products of labor and capital are 6 and 12, respectively.
  2. Could the firm reduce its total cost while maintaining its current level of production? If so, how? Carefully explain why or why not.
  3. Could the firm increase its profit? If so, how? Carefully explain why or why not.
  4. Executives at Atkins are trying to decide whether to increase employment of labor. The firm currently employs 10 units of labor and produces 435 units of output. The wage rate is $70. The marginal product of the 11th unit of labor is 5 units of output. Output is sold in a competitive market at a price of $12 per unit.
  5. Pat argues against expansion because “it would reduce the average product of labor.” Would increasing employment from 10 to 11 decrease the average product of L? Explain briefly.
  6. Jean argues for increasing employment because “revenue would increase.” Would increasing employment from 10 to 11 increase total revenue? Explain briefly.
  7. Would you recommend an increase in employment? Explain why or why not.