Problem 1: Production function Concepts. Indicate whether each of the following statements is true or false. Explain your answers.
A. Decreasing returns to scale and increasing average costs are indicated when εQ<1.
B. If the marginal product of capital falls as capital usage grows, the returns to capital are decreasing.
C. L-shaped isoquants describe production systems in which inputs are perfect substitutes.
D. Marginal revenue product measures the profit earned through expanding input usage.
E. The marginal rate of technical substitution will be affected by a given percentage increase in the marginal productivity of all inputs.
Problem 2: Compensation Policy. “Pay for performance” means that employee compensation closely reflects the amount of value derived from each employee’s effort. In economic terms, the value derived from employee effort is measured by net marginal revenue product. It is the amount of profit generated by the employee, before accounting for employment costs. Holding all else equal, indicate whether each of the following factors would be responsible for increasing or decreasing the amount of money available for employee merit-based pay.
A. Government mandates for employer-provided health insurance
B. Rising productivity due to better worker training
C. Rising employer sales due to falling imports.
D. Falling prices for industry output
E. Rising prevalence of uniform employee stock options