Question

1. First, you will have to determine what kind of firm you want to be and what product you will (hypothetically) produce. 2. Next, you will have to describe the production function of your firm. Naturally production processes are very complex, so you might have to aggregate inputs in 2 categories, capital and labor. These are things you should keep in mind when choosing your specification: a. Does this production process exhibit increasing, decreasing or constant returns to scale? b. Does your production process require both inputs to be used in a fixed ratio? Can you substitute capital and labor for each other at a fixed ratio? Will the rate at which you can substitute them depend on how much you are already using? In other words, do you think your production process should be described by a Leontief production function, perfect substitutes production function or Cobb-Douglas production function? c. Does your production process have a higher marginal product of labor or marginal product of capital?

Answer 1

I will produce automobiles (cars) and the firm will be capital intensive. As most of the automobile manufacturing firms use robotics technology and thus the firm is chosen to be capital intensive.

In case of capital intensive technology, the rate of increase in output is proportionally higher than the rate of increase of inputs. Thus it would give increasing returns to scale.

The inputs are not used in a fixed ratio. There is more of labors than capital. More units of labor are substituted by less units of capital. This is a case of Marginal rate of Technical substitution, where the higher number of units of labor is substituted by lesser number of units of capital. As a result it is Cobb-Douglas production function.

It has a higher marginal product of capital where each additional unit of capital produces higher units of output.