Tony's Pizza's production function is shown in the table above. a) Suppose Tony operates Plant 2. He hires 2 workers and produces 20 pizzas a day. Is the pizzeria technologically efficient? Why or why not? b) Suppose Tony operates Plant 1

Question

He hires 2 workers and produces 18 pizzas per day. Is Tony's Pizza technologically efficient? Why or why not? Can Tony increase production to 22 pizzas a day in the short run? If yes, how? c) Suppose Tony operates Plant 3. What is the marginal product of labor when the fourth worker is hired? When operating Plant 3, does Tony experience diminishing marginal returns? Explain. d) Suppose Tony currently uses Plant 3. Can he increase production from 40 to 50 pizzas per day in the short run? In the long run? If yes, how?

Answer 1

a) The firm is not technologically efficient. The production function shows that with 2 ovens and 2 workers it is possible to produce 22 pizzas a day.
b) Tony's Pizza is technologically efficient. The production function shows that 18 pizzas is the maximum output that 2 workers can produce with 1 oven. Tony can increase production to 22 pizzas per day in the short run by hiring more labor.
c) When the 4th worker is hired, the marginal product of labor is the change in output, 40 pizzas - 33 pizzas = 7 pizzas, divided by the change in the labor input, 1 worker. So the marginal product of labor for the 4th worker is 7 pizzas per day. Tony experiences diminishing marginal returns because the marginal product of labor diminishes as more workers are hired.
d) If Tony uses Plant 3, he cannot increase production from 40 to 50 pizzas per day in the short run. The short-run production function for Plant 3 shows that the maximum output that the firm can produce with this plant is 48 pizzas per day. In the long run, however, Tony can increase his output to 50 pizzas per day by increasing his plant size to 4 ovens (Plant 4 ) and hiring 5 workers.