You collect the following production data for your firm: 1. Which functional for

Question

You collect the following production data for your firm:

1. Which functional form (linear, quadratic, cubic) is most suitable to your data? Construct a scatter diagram but be sure to just do the dots, don’t include the lines that connect them. Then, play around with the trendline feature and include what you consider to be the best trendline.

2. Using OLS, estimate the firm’s short-run production function. Comment on the strength of the regression results.

3. Calculate the QQ, APAP, and MPMP for L=8L=8 workers.

4. At 8 workers, is SMC rising or falling, and how do you know?

Q L 253 2 1376 6 498 3 66 1 1900 9 1066 5 1727 7 815 4 2201 11 2300 10

Explanation / Answer

1. As per the scatter plot, the linear trend line will suit the data figures given above in the table.

2. Using OLS, the regression equation of the above mentioned data is :

Q = -127.663 + 232.39 L

The regession results are significant as t value is high which indicates significant independent variable or labor is significant in determing output of the firm. Also, R squared is high which indicates that 97 per cent of the variation in output is determined by the variation in labor.

3. When L = 8, output = -127.663 + 232.39 * 8 = 1731.46 units

AP = TP / L = 1731.46 / 8 = 216.43 unts

MP = TP at L = 8 - TP at L = 7 = 4.46 units

4. Since Marginal product is rising at decreasing rate at L =8, Thus, short run marginal cost will be rising.

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