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Download Q1. Define production function and represent it in mathematical form
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FAQs Q1. Define production function and represent it in mathematical form. Ans. Production function specifies the maximum amount of output that can be realized by using each combination of quantities of inputs or factors of production. It is denoted by Y = F (L, K). It shows how much output (Y) the economy can produce from different combinations of labor (L) and capital (K) Q2. What are factors of production and how are they rewarded? Ans. Factors of production or inputs are defined as anything that a firm uses in its production process. Main inputs in a production process are land, labor, capital and entrepreneurs. These inputs are rewarded for their contribution into the production process. The reward for land is rent, for labor is wage, for capital is interest and for entrepreneur is profit. Q3. Explain the importance of time period in determining maximum output. Ans. There are two important periods short run and ling run. In short run, inputs can be fixed inputs (whose quantity cannot be changed during the time period under consideration like land, capital) or variable inputs (an input whose quantity can be changed during the relevant period like labor).But in long run all the inputs or factors are variable inputs. So in short run the maximum output is limited by the amount of variable factor with fixed factor. Q4. What is distribution theory and why is a special case of price theory? Ans. The income earned through the sales of the product or the remuneration for services is distributed to the owners of the factors of production. The theory which explains determination of factor incomes is known as the theory of distribution (or theory of factor pricing). Distribution theory is a special case of the theory of prices. Q5. Why demand for factors of production is called as derived demand? Ans. Factor demands are derived demands i.e., demand for input depends on the demand for output or final product. If demand for any commodity increases the commodity demand curve shifts outward and related to this demand for input will also increase and the input demand curve will also shift outwardly. Q6. Why factor demands are interdependent demand? Ans. Factor demand is said to interdependent production is an outcome of various combinations of different input used with each other. It is a team work. For example – a chain saw cannot cut a tree itself, it has to be used by a labor. Thus productivity of one factor depends upon the amount of the other factor working with it. Q7. What causes labor demand curve to shift? Ans. The output price, Technological change and supply of other factors of production. Q8. What is Marginal productivity of factor pricing? Ans. The key to all factor incomes lies in the concept of marginal product of different factors of production. Marginal product of an input is the extra output produced by one additional unit of that input or the physical units of product per unit of additional input. Marginal Physical Product (MPP) is another term used for marginal product. Q9. Explain the relationship between production function and marginal productivity. Ans. Slope of production function is marginal product of labor and as one move along the total productivity curve more labor is required to produce extra amount of output. This is because of law of diminishing returns. Q10. What is marginal Revenue productivity? Ans. Demands for various factors of production are derived from the revenues that each factor yields on its marginal physical product. This additional revenue produced by an additional unit of input is called Marginal Revenue Product (MRP) or Value of Marginal Product of Labor (VMPL). It is calculated as the marginal product of the input multiplied by the marginal revenue obtained by selling the extra unit of input. Q11. How marginal productivity is related to marginal revenue and marginal product? Ans. Marginal Revenue Product of Labor (MRPL) or VMPL= MR × MPL ----- (1) MR = ∆TR/∆Q and MPL = ∆Q/∆L Substituting, in (1) MRPL = ∆TR/∆Q.∆Q/∆L = ∆TR/∆L The same relationship holds for all the other inputs.