The firm must have capacity to do so. Production system consists of inputs at one end and the output at the other. The rate at which one input must be substituted for another keeping output constant, as along an isoquant, is called the marginal rate of technical substitution (MRTS), and is expressed as. Based on this generic definition, a business process considered within the framework of trade facilitation can be defined as: A chain of logically connected activities to move goods and related information across borders from buyer to seller and to provide related services. When L equals 2, however, the marginal product of labour (shown in Table 13.1) is 28 units (or average MPL = 2.8 units). The isocost line is, in fact, the producer’s budget line. In this case a doubling of inputs (α = 2) leads to an exact doubling of output (λ = 2). In Fig. Thus, more output can be produced in the short run by using more hours of labour (a variable service) and other variable inputs, with the existing plant and equipment (or the stock of capital). This combination may now be illustrated graphically. Ans. output: Production; quantity produced, created, or completed. To ensure this, the profit-maximizing firm has to choose that input combination for which the marginal product divided by input price is the same for all inputs used. Over this range, marginal product is increasing. In other words, as Pappas and Brigham have put it, “a firm will produce products that are complementary in the sense that producing them jointly is less costly than individual production”. 100) and labour receives a wage of Rs. That is, the production process demands more than a doubling of all inputs in order to exactly double the level of output. For similar reasons, the marginal product of capital increases as less capital and more labour are used to produce the same level of output. The rays through the origin in all the three panels have equal slope. It is argued that education production function studies should rely less on large-scale survey data; and … Suppose that we start with the following production function: Furthermore, suppose that we multiply each input by a constant a. We may now proceed a step further. Based on these initial input values, total production would be, Q = (7)(2) + (4)(1) + (0.3)(3) = 18.9. This approach seems to be more practical than the previous one. A firm reaches equilibrium and thus minimizes cost when the lowest possible isocost line (whose slope is the factor-price ratio) is tangent to the isoquant (whose slope is MRTS). It results from a change in factor prices. The sum of the quantities of each input used, times the respective input price, gives the minimum cost of producing every level of output. Thus, constant returns in panel (b) leads to linear total cost curve in panel (b’) – constant cost per unit. The distinction is not based on any time period but is made on the basis of the possibility of factor substitution. Thus the rational decision maker will not use more than 5.6 units of labour, whatever be its price. All the relationships between cost and its individual determinants, the cost-output relationship is the most important one. The law of diminishing returns simply states that as the quantity of a variable input is increased by additional equal increments, while keeping all other factors and the state of technology unchanged, the increment to total output will eventually decline. Moreover, the elasticity of production is negative in stage 3, thus forcing the same conclusion. 13.10. 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