Uses of production function, Managerial Economics

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The production function can have many uses. It can be used to compute least-cost factor combination for a given output or maximum output combination for a given cost. Knowledge of production function can be helpful in deciding on the value of using a variable factor in the production process. As long as marginal revenue productivity of a variable factor exceeds its price, it would be profitable to increase its use. When marginal revenue productivity of factor becomes equal to its price the extra employment of the factor must be stopped. Because the production function demonstrates the returns to scale it would help in the decision making. If the returns to scale are diminishing, it's not worthwhile to increase production. Opposite would be true if returns to scale are increasing.


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