Questions 149

output falls to q = 90.6 * 100.4 ≈ 9.39, and the average product of labor rises to
APL ≈ 9.39>9 ≈ 1. 04. That is, a 10% reduction in labor causes output to fall by
6.1%, but causes the average product of labor to rise by 4%. The firm’s output falls
less than 10% because each remaining worker is more productive.
Until recently, most large Japanese firms did not lay off workers during down-
turns. Thus, in contrast to U.S. firms, their average product of labor fell during
recessions because their output fell while labor remained constant. Similarly,
European firms have 30% less employment volatility over time than do U.S.
firms, at least in part because many European firms that fire workers are subject
to a tax. Consequently, with other factors held constant in the short run, reces-
sions might be more damaging to the profit of a Japanese or European firm than
to the profit of a comparable U.S. firm. However, retaining good workers over
short-run downturns might be a good long-run policy.

SUMMARY
1. Production Functions. A production function summa- An isoquant shows the combinations of inputs that can
rizes how a firm combines inputs such as labor, capital, produce a given level of output. The marginal rate of
and materials to produce output using the current state of technical substitution is the absolute value of the slope
knowledge about technology and management. A produc- of the isoquant and indicates how easily the firm can
tion function shows how much output can be produced substitute one factor of production for another. Usually,
efficiently from various levels of inputs. A firm produces the more of one input the firm uses, the more difficult
efficiently if it cannot produce its current level of output it is to substitute that input for another input. That is,
with less of any one input, holding other inputs constant. the marginal rate of technical substitution diminishes
2. Short-Run Production. In the short run, a firm can- as the firm uses more of an input.
not adjust the quantity of some inputs, such as capital. 4. Returns to Scale. When a firm increases all inputs in
The firm varies its output in the short run by adjusting proportion and its output increases by the same propor-
its variable inputs, such as labor. If all factors are fixed tion, the production process is said to exhibit constant
except labor, and a firm that was using very little labor returns to scale. If output increases less than in propor-
increases its use of labor, its output may rise more than tion to the increase in inputs, the production process
in proportion to the increase in labor because of greater has decreasing returns to scale; if it increases more
specialization of workers. Eventually, however, as more than in proportion, it has increasing returns to scale.
workers are hired, the workers get in each other’s way All three types of returns to scale are common. Many
or must wait to share equipment, so output increases by production processes exhibit first increasing, then con-
smaller and smaller amounts. This latter phenomenon stant, and finally decreasing returns to scale as the size
is described by the law of diminishing marginal returns: of the firm increases.
The marginal product of an input—the extra output 5. Innovation. Using process innovation or organiza-
from the last unit of input—eventually decreases as tional innovations, firms achieve technical progress:
more of that input is used, holding other inputs fixed. They can produce more output than before with the
3. Long-Run Production. In the long run, when all same inputs. This technical progress changes the pro-
inputs are variable, firms can substitute between inputs. duction function.

QUESTIONS
All exercises are available on MyLab Economics; * = answer at the back of this book; = this exercise is available in
Excel Grader in MyLab Economics.
1. Production Functions K = 6 also yields q = 10 for this production func-
tion? Why or why not?
1.1 What are the main types of capital and labor that can
1.3 As in Question 1.2, suppose that the production
be used to produce candy?
function shows that if L = 3 and K = 5 then q = 10.
*1.2 Suppose that for the function q = f(L, K), if L = 3 Is it possible that L = 3 and K = 6 yields q = 11 for
and K = 5 then q = 10. Is it possible that L = 3 and this production function? Explain briefly.

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