Production function-statistical significance of function

Reference no: EM1316478

1. You are planning a short-run production function for your firm, and you have collected the following data on labour usage and output:

Labour usage	Output
3	1
7	2
9	3
11	5
17	8
17	10
20	15
24	18
26	22
28	21
30	23

a) Does a cubic equation appear to be a suitable specification, given these data? You may wish to construct a scatter diagram to help you answer this question.

b) Using a computer and software for regression analysis, estimate your firm\'s short-run production function using the data given here. Do the parameter estimates have the appropriate algebraic signs? Are they statistically significant at the 5 percent level?

c) At what point do you estimate marginal product begins to fall?

d) Calculate estimates of total. Average, and marginal products when the firm employs 23 workers

e) When the firm employs 23 workers, is a short - run marginal cost (SMC) rising or falling? How can you tell?

2. Production and Cost in the Long Run

Gamma Corporation, one of the firms that retain you as a financial analyst, is considering buying out Beta Corporation, a small manufacturing firm that is now barely operating at a profit. You recommend the buyout because you believe that new management could substantially reduce production costs, and thereby increase profit to quite attractive level. You collect the following product information in order to convince the CEO at Gamma Corporation that Beta is indeed operating inefficiently:

MP_L = 10 P_L = $20
MP_K = 15 P_K = $15

Explain how these data provide evidence of inefficiency. How could the new manager of Beta Corporation improve efficiency?

Reference no: EM1316478

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