Production Function: In a perfectly linear production function, the total output (Y) can be

expressed as:

𝑎 + 𝑏1 𝑋1 + 𝑏2 𝑋2
Where:
 Y = Total output
 X1 = Quantity of Input 1 (e.g., Labor)
 X2 = Quantity of Input 2 (e.g., Capital)
 a = Fixed output level (intercept)
 b1, b2 = Coefficients that represent the contribution of each input

Let’s assume a company produces tables using two inputs:

 Input 1: Labor (measured in hours)

 Input 2: Wood (measured in board feet)

Suppose the following linear relationship holds:

 Each hour of labor contributes 3 tables to production (b1 = 3)

 Each board foot of wood contributes 2 tables to production (b2 = 2)
 There is no fixed output level from the production process (a = 0)

The linear production function for this scenario becomes:

𝑌 = 0 + 3𝑋1 + 2𝑋2

Calculation of Total Output

Let’s calculate the total output for various combinations of inputs:

1. Example 1:

o X1 = 4 hours of labor
o X2 = 5 board feet of wood

Total Output:
𝒀 = 𝟑(𝟒) + 𝟐(𝟓) = 𝟏𝟐 + 𝟏𝟎 = 𝟐𝟐

2. Example 2:

X1 = 6 hours of labor
X2 = 3 board feet of wood

𝒀 = 𝟔(𝟒) + 𝟐(𝟓) = 𝟏𝟖 + 𝟔 = 𝟐𝟒
Leontief Production Function Example

The Leontief production function assumes that inputs are used in fixed proportions. It can be
mathematically represented as:

𝑲 𝑳
𝑸 = 𝑭(𝑲, 𝑳) = 𝒎𝒊𝒏 ( , )
𝒂 𝒃

Where:
 Q = Total output
 K = Quantity of capital input
 L = Quantity of labor input
 a = Fixed amount of capital needed to produce one unit of output
 b = Fixed amount of labor needed to produce one unit of output

Let’s say a factory produces chairs using:

 Input 1 (Capital): Machines (measured in units)

 Input 2 (Labor): Labor hours (measured in hours)

Assume the following fixed proportions:

 1 machine (K) is required to produce 2 chairs (Q) (thus a=1)

 2 hours of labor (L) are required to produce 2 chairs (Q) (thus b=2)

The Leontief production function for this scenario can be expressed as:

𝑲 𝑳
𝑸 = 𝑭(𝑲, 𝑳) = 𝒎𝒊𝒏 ( ′ )
𝟏 𝟐

Calculation of Total Output

Let’s calculate the total output for various combinations of inputs:

Example 1:

K = 3 machines
L = 5 hours of labor

Total Output:

𝟑 𝟓
𝑸 = 𝒎𝒊𝒏 ( , ) = 𝒎𝒊𝒏 (𝟑, 𝟐. 𝟓) = 𝟐. 𝟓 𝒄𝒉𝒂𝒊𝒓𝒔
𝟏 𝟐

Since output must be a whole number, we can say the factory can produce 2 chairs.
Example 2.

K = 2 machines
L = 4 hours of labor

𝟐 𝟒
𝑸 = 𝒎𝒊𝒏 ( , ) = 𝒎𝒊𝒏 (𝟐, 𝟐) = 𝟐 𝒄𝒉𝒂𝒊𝒓𝒔
𝟏 𝟐

In the context of the Leontief production model, the use of constants multiplied with inputs
(denoted as aK and bL) expresses the fixed proportions of inputs required to produce output. This
approach emphasizes that a certain amount of each input is necessary to achieve a specific level of
output, reflecting the characteristics of a production process that operates under fixed proportions.

The Leontief production function can be expressed mathematically as:

𝑸 = 𝒎𝒊𝒏(𝒂𝑲, 𝒃𝑳)

Breakdown of the Expression

1. Fixed Proportions:
o The constants a and b represent the specific amount of each input needed to produce
one unit of output.
o For example, if a=1 and b=2, it indicates that 1 unit of capital and 2 units of labor
are necessary to produce 1 unit of output.

2. Multiplication with Inputs:

o In this representation, when you multiply K by a and L by b, it reflects the total
amount of each input that contributes to the output.
o The terms aK and bL signify the effective contribution of each input based on the
quantity used:
 aK indicates how much output can be produced given the capital available.
 bL indicates how much output can be produced given the labor available.

3. Determining Output:
o The function uses the minimum of these two products to determine the total output,
reflecting that production is constrained by the input that is used in the least quantity
relative to its required amount.
o This means that if you have more capital than necessary to produce a certain amount
of output but not enough labor, your total output will be limited by the amount of
labor available.

Let’s illustrate this with an example:

Assume:
o a=1 (1 unit of capital needed for each output unit)
o b=2 (2 units of labor needed for each output unit)

Given:
 K=5 (5 units of capital)
 L=8 (8 units of labor)

Calculating Total Output:

1. Calculate aK and bL:

𝒂𝑲 = (𝟏) ∗ (𝟓) = 𝟓
𝒃𝑳 = (𝟐) ∗ (𝟖) = 𝟏𝟔

2. Determine output:

𝑸 = 𝒎𝒊𝒏(𝟓, 𝟏𝟔) = 𝟓 𝒖𝒏𝒊𝒕𝒔 𝒐𝒇 𝒐𝒖𝒕𝒑𝒖𝒕

The Cobb-Douglas production function is a widely used functional form to represent the
relationship between two or more inputs (typically labor and capital) and the output produced. It
is expressed mathematically as:

𝑄 = 𝐴 𝐾 𝑎 𝐿𝑏

Where:
 Q = Total output
 A = Total factor productivity (a constant that represents the efficiency of production)
 K = Quantity of capital input
 L = Quantity of labor input
 a = Output elasticity of capital (how much output changes with a change in capital)
 b = Output elasticity of labor (how much output changes with a change in labor)

Cobb-Douglas Production Function:

Let's consider a scenario where a firm produces widgets using labor and capital.

1. Assumptions:

o Total factor productivity, A =2

o Output elasticity of capital, a = 0.5
o Output elasticity of labor, b = 0.5
o Capital input, K = 100 units
o Labor input, L = 64 units
o
2. Using the Cobb-Douglas formula:
 𝑄 = 2 ∗ 1000.50 640.50

𝑄 = 2 ∗ 10 ∗ 8 = 160

The Cobb-Douglas production function can be generalized for more inputs, and the sum of the
output elasticities (a+b) can provide insights into the returns to scale:

 If a + b = 1, the production function exhibits constant returns to scale.

 If a+ b < 1, it exhibits decreasing returns to scale.
 If a + b > 1, it exhibits increasing returns to scale.

Linear Example of Productivity Measurement

Assume a company produces widgets using labor and capital. The production function is given
by:

Q=K+L

Where:

 Q = Total output (widgets)

 K = Capital input (units of machinery)
 L = Labor input (hours of labor)

Inputs

Let’s assume the company uses the following inputs:

 Capital Input (K): 10 units of machinery

 Labor Input (L): 20 hours of labor

Step 1: Calculate Total Product (TP)

Using the production function, we can calculate the total output produced:

Q = K + L = 10 + 20 = 30 units

Step 2: Calculate Average Product (AP)

The average product of labor and capital can be calculated as follows:

Average Product of Labor:

𝑇𝑃(𝑄) 30
𝐴𝑃𝐿 = = 20 = 1.50 𝑢𝑛𝑖𝑡𝑠
𝐿

Average Product of Capital:

𝑇𝑃(𝑄) 30
𝐴𝑃𝐾 = = = 3 𝑢𝑛𝑖𝑡𝑠
𝐾 10

Step 3: Calculate Marginal Product (MP)

To calculate the marginal product, we need to examine the output changes with respect to
changes in inputs.

Assuming:

 Increasing capital by 1 unit (from 10 to 11 units) while keeping labor constant (20 hours).

New Output:

Q′ = 11 + 20 = 31 units

Change in Total Product:

ΔTP = Q′ − Q = 31 – 30 = 1 unit

Change in Capital: ∆𝐾 = 1

Marginal Product of Capital:

∆𝑇𝑃 1
= = 1 𝑢𝑛𝑖𝑡
∆𝐾 1

the linear production function you provided:

𝑄 = 𝐹 (𝐾, 𝐿) = 𝑎𝐾 + 𝑏𝐿

Where:

 Q = Total output
 K = Capital input
 L = Labor input
 a = Contribution of capital to output (output per unit of capital)
  b = Contribution of labor to output (output per unit of labor)

Example of Measurement of Productivity

Assume:

 Output per unit of capital (a): 2 units per unit of capital

 Output per unit of labor (b): 3 units per hour of labor

Inputs:

 Capital Input (K): 4 units of capital

 Labor Input (L): 5 hours of labor

Step 1: Calculate Total Product (TP)

Using the production function:

𝑄 = 𝐹 (𝐾, 𝐿) = 𝑎𝐾 + 𝑏𝐿 = 𝑄 = 2(4) + 3(5) = 23 𝑢𝑛𝑖𝑡𝑠

Step 2: Calculate Average Product (AP)

The average product for both inputs can be calculated as follows:

1. Average Product of Labor:

𝑇𝑃(𝑄) 23
𝐴𝑃𝐿 = = 4.6 𝑢𝑛𝑖𝑡𝑠
𝐿 5

2. Average Product of Capital:

𝑇𝑃(𝑄) 23
𝐴𝑃𝑘 = = 5.75
𝐾 4

3. Step 3: Calculate Marginal Product (MP)

To calculate the marginal product, we analyze the change in output with respect to
changes in inputs.

Assuming we increase the labor input from 5 hours to 6 hours while keeping capital
constant at 4 units:

New Output Calculation:

 𝑄′ = 𝑎𝐾 + 𝑏𝐿′ = 2(4) + 3(6) = 26 𝑢𝑛𝑖𝑡𝑠

∆𝑻𝑷 = 𝑸′ − 𝑸 = 𝟐𝟔 − 𝟐𝟑 = 𝟑

Change in Labor: 1 hour

Marginal Product of Labor:

∆𝑇𝑃 3
𝑀𝑃𝐿 = = =3
∆𝐿 1

Marginal Product in the Context of Cobb – Douglas Production Function:

𝑸 = 𝑭(𝑲, 𝑳) = 𝑲𝒂 𝑳𝒃

Marginal Products
The marginal products for capital and labor can be calculated as follows:

Marginal Product of Capital:

𝑀𝑃𝐾 = 𝑎𝐾 𝑎−1 𝐿𝑏
Marginal Product of Labor:
𝑀𝑃𝑙 = 𝑏𝐾 𝑎 𝐿𝑏−1
Assume:

a=0.50 (output elasticity of capital)

b=0.50 (output elasticity of labor)

Given:
 Capital input (K): 16 units
 Labor input (L): 9 units

Step 1: Calculate Total Output (Q)

Using the Cobb-Douglas production function:

𝑄 = 𝐾 0.50 𝐿0.50

𝑄 = 160.50 90.50
 𝑸 = 𝟒 ∗ 𝟑 = 𝟏𝟐 𝒖𝒏𝒊𝒕𝒔 𝒐𝒇 𝒐𝒖𝒕𝒑𝒖𝒕

Marginal Product of Capital (MPK):

𝑀𝑃𝐾 = 0.50 ∗ 160.50−1 ∗ 90.50

𝟏
𝑴𝑷𝑲 = 𝟎. 𝟓𝟎 ∗ ∗ 𝟑 = 𝟎. 𝟑𝟕𝟓 𝒖𝒏𝒊𝒕𝒔
𝟒

Marginal Product of Capital (MPL):

𝑄 = 160.50 90.50

𝑀𝑃𝐿 = 0.50 ∗ 160.50 ∗ 90.50−1

𝟏 𝟐
𝑴𝑷𝑳 = 𝟎. 𝟓𝟎 ∗ 𝟒 ∗ = 𝒖𝒏𝒊𝒕𝒔
𝟑 𝟑

𝑄 = 𝐹(𝐾. 𝐿) = 𝐾 𝑎 𝐿𝑏

Assume:

 Output elasticity of capital: a=0.40

 Output elasticity of labor: b=0.60

Given:
 Capital input (K): 25 units
 Labor input (L): 16 units

𝑄 = 250.40 160.60

𝑸 = 𝟑𝟏. 𝟖𝟒 𝒐𝒓 𝟑𝟐 𝒖𝒏𝒊𝒕𝒔

Determine the following:

APL and APK