CHAPTER 7

Production

CHAPTER ANALYSIS

So far, we have focused on the demand side of product markets. In this chapter we begin our
analysis of the supply side of the market. The relationships between the inputs used to produce
goods and the quantity of the goods produced are the primary topics of this chapter.

7.1 Relating Outputs to Inputs

There are three inputs, land, labor, and capital that firms use to produce output. These inputs
are referred to as factors of production. For example, an automobile is the output of General
Motors. The inputs used to produce the automobile include steel, aluminum, plastic, rubber,
glass, paint, machine tools, engineers, technicians, laborers, and so on. A production function
is a technical relationship between inputs and output that shows the maximum output that can
be produced in a given time period by a specific combination of inputs. When the firm
produces the maximum output from any given combination of labor and capital, we say it is
technologically efficient.

7.2 Production When Only One Input is Variable: The Short Run

Production responses can be studied in the short run and the long run. In the short run, at
least one input, usually capital, is fixed at some level. For example, new factories cannot be
built overnight. In the long run, there are no fixed inputs because the firm has the time to alter
its quantities of all inputs. The total output the firm produces is referred to as total product.
Average product is total output divided by the input used to produce that output, while
marginal output is the change in total output that results from a one-unit change in the amount
of an input, assuming all other inputs are constant.

It is important to understand the relationships between total product, average product, and
marginal product. In the text, Figure 7.1 and 7.2 illustrate the derivation of the total, average,
and marginal product curves. Figure 7.1 shows that when the marginal product curve lies
above the average product curve, the average product curve is rising; when the marginal
product curve lies below the average product curve, the average product curve is falling; and
when the marginal product curve is equal to the average product curve, the average product
curve is constant. In other words, the marginal pulls the average. For example, consider the
relationship between your score on a final exam and the average score for a course. If your
final exam score (the marginal test) is greater than your current average, your average for the
course will increase. If the final exam score is below your current average, your average for the
course will fall.

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The shapes of the product curves reflect the law of diminishing marginal returns, which
states that as an input is successively increased, output is increasing but after a certain point the
rate at which it increases is decreasing. In other words, an increase in an input will cause
output to go up, but at some point the change at which it increases begins to fall. T This
implies the marginal product of the variable input will eventually decline.

Consider the following holds true for a Pizza Parlor, where labor represents the number of
chefs, total product is the number of pizzas produced, and marginal product shows the
additional pizzas produced from hiring an additional worker. The table shows that while total
output continuously increases, marginal output increases up until the third chef and then begins
to decline.

Labor Total Product Marginal Product

0 0 0
1 20 20
2 50 30
3 80 30
4 100 20
5 110 10
6 115 5

7.3 Production When All Inputs Are Variable: The Long Run

In the long run, all inputs can change implying they are variable inputs. Production can be
analyzed by using isoquants, a tool similar to indifference curves. An isoquant shows all the
combinations of inputs that will produce a particular level of output. Isoquants are very similar
to indifference curves; they are downward sloping, convex, non-intersecting, and a higher level
of output is associated with an isoquant further from the origin.

The slope of an isoquant measures the marginal rate of technical substitution (MRTS). The
MRTS shows the amount of one input (such as capital K) that can be reduced without changing
output, when there is a unit increase in another input (such as labor L). Since isoquants slope
down, the MRTS is negative, but the minus sign is dropped by convention. The marginal rate
of technical substitution is also equal to the relative marginal productivities of the inputs.
Therefore, the MRTS is equal to the change in capital divided by the change in labor, and the
ratio of the marginal products.

MRTSLK = ∆K/∆L = MPL/MPK

7.4 Returns to Scale

An important concept used in analyzing the long-run production process is that of returns to
scale. Returns to scale shows what happens to output when both inputs are proportionately

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changed. For example, suppose we double the labor and capital inputs and want to see the
effect on output. If output doubles there are constant returns to scale; if output more than
doubles, there is increasing returns to scale; and if output less than doubles, there are
decreasing returns to scale. Section 7.4 in the text provides alternative explanations for why a
given production process may exhibit constant, increasing, or decreasing returns to scale.

7.5: Functional Forms and Empirical Estimation of Production Functions

Production functions can be estimated statistically. A specific functional form is assumed, and
then data is used to estimate the key relationships by regression analysis. A common
production function used for the purpose of estimation is the Cobb-Douglas production
function. For two inputs, it takes the form:

Q = aLbKce.

The function can be estimated by taking the natural logarithms of both sides of the equation. In
practical terms, the most difficult part is measuring the capital stock. The values of b and c are
crucial. Diminishing marginal returns for labor exist when b < 1, and diminishing marginal
returns for capital exist when c < 1. If b + c are equal to one, then constant returns to scale
apply. If b + c sum to less than one, there are decreasing returns to scale, and if they sum to
more than one, there are increasing returns to scale.

7.6 The Mathematics behind Production Theory (online only content)

We can use mathematics to further explore production theory.

Looking at the marginal-average product relationship, when all inputs except one are held
constant, output can be expressed as

Q = Q(L)

where output depends on the quantity of labor.

So, the marginal and average products of the variable input are

MPL + dQ/dL;

and

APL = Q/L = [Q(L)]/L.

So,

dAPL/dL = [d(Q/L)]/dL = [L(dQ/dL) – Q]/L2.

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Factoring out (1/L):

dAPL/dL = (1/L) ( (dQ/dL) – (Q/L));

= (1/L) (MPL – APL).

Looking at the MRTS and the ratio of the marginal products, we can express output as a
function of two inputs:

Q = Q (L, K)

where L and K are the quantities of the two inputs and technology is fixed.

We know that ∂Q/∂L and ∂Q/∂K are the marginal products of labor and capital.
The relationship between the production function and the isoquants used in the text is

dQ = (∂Q/∂L)dL + (∂Q/∂K)dK.

Since there is no change in total output along an isoquant, dQ = 0, implying

(∂Q/∂K)dK = (∂Q/∂L)dL;

or

dK/dL = -[(∂Q/∂L)/ (∂Q/∂K)].

So, we know the slope of an isoquant dK/dL equals the negative ratio of the marginal products.

Finally, we can consider some additional properties of constant returns to scale production
functions. Mathematically, a production functions that exhibits constant returns to scale is a
linear homogenous function.

So, for a production function Q = Q (L,K) to be a linear production function is must satisfy:

sQ = Q(sL, sK)

where s is equal to any positive constant. In other words, a proportionate increase in both inputs
must increase output in the same proportion.

The Cobb-Douglas production function is a commonly used linear homogeneous production

function.

Q = LαK1-α

where α is a positive constant with a value between 0 and 1.

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It is important to understand two important properties of linear homogenous production

functions.

First, the marginal product of each input depends only on the proportion in which inputs are
used, (K/L). Second, the MRTS depends only on the proportion in which inputs are used. In
other words, the slopes of isoquants are equal along a ray through the origin.

ILLUSTRATIONS
Marginal Average Relationship

The marginal-average relationship is an important concept that comes up repeatedly in

economics. Whenever marginal product is greater than average product, it pulls average
product up; when marginal product is less than average product it pulls average product down;
and when marginal product equals average product, average product stays the same. The
marginal-average relationship will show up in the next chapter as well. Average cost falls
when marginal cost lies below average cost, rises when marginal cost lies above average cost,
and is constant when marginal cost equals average cost. This relationship is true for the
marginal and average of anything.

We can use batting averages to illustrate this last statement. Ted Williams was the last baseball
player to hit over 0.400 in a season. (A 0.400 batting average is when a player gets a hit 40
percent of the times he is at bat.) On a particular day, suppose Williams' average was exactly
0.400. If he got up five times and had two hits, his average after the game would still be 0.400,
because the marginal average (2 out of 5) exactly equaled his season average. If he had gotten
three hits in five at bats, his new season average would be greater than 0.400 because his
marginal was 60 percent. Finally, if he had gone 1 for 5, his new seasonal average would be
less than 0.400 because his marginal was 20 percent.

Returns to Scale

The theoretical concept of returns to scale involves the effect on output of a proportionate
change in all inputs used to produce the output. To illustrate the concept, let's use a simple
example. You start up your own business of selling firewood. You get a chain saw and a
pickup truck, go to the woods, cut down trees, and sell the firewood to consumers. Business is
good, so you decide to double your scale. To do this, you get another pickup truck, another
chain saw, and hire your twin to work with you. All inputs have exactly doubled. You might
expect output to double, too, that is, constant returns to scale to prevail.

However, when firms expand they generally do not increase each and every input by the same
proportion. In the example above, your twin might not work as quickly as you do, you might
replace your pickup with a larger truck, or you might purchase a larger chain saw. That is, it is
unlikely that you will exactly replicate the inputs you began with. This example also illustrates

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an important source of increasing returns to scale. One type of capital equipment may be
appropriate when the scale of operations is small, yet inappropriate when the scale of operation
is greater. Larger increases in output often accompany the transition from small-scale
technique to large-scale technique.

KEY CONCEPTS
factors of production short run
production function long run
technologically efficient variable inputs
fixed inputs isoquant
total product marginal rate of technical substitution
average product constant returns to scale
marginal product increasing returns to scale
law of diminishing marginal returns decreasing returns to scale
Cobb-Douglas production function

REVIEW QUESTIONS

True/False

F 1. There is only one efficient technique to produce a certain quantity of output.

T 2.A production function identifies the physical constraints a firm faces.

F 3.The fixed input is held constant along an isoquant.

F 4.The short run is defined as a period less than 1 year.

T 5.A firm that is making plans to build a new factory is operating in the long run.

F 6.The marginal product of an input can be defined as the total output divided by the
amount of the input used to produce that output.

F 7.The total product curve falls when the marginal product curve falls.

F 8. Diminishing marginal returns imply that workers hired first have more innate ability
than those hired last.

T 9.The slope of an isoquant measures the marginal rate of technical substitution.

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T 10. Isoquants differ from indifference curves in that the spacing between indifference
curves does not measure changes in well being while the spacing between
isoquants measures changes in output.

Multiple Choice/Short Answer

1. All the following are inputs in the production of computers except

a. engineers.
b. technological change.
c. electricity.
d. accountants.

2. A production function consists of production processes that are technologically

_______________. Efficient

3. A fixed input is one for which

a. it is impossible to vary the quantity used in the short run.
b. it is impossible to vary the quantity used in the long run.
c. it is too costly to vary the quantity used in the short run.
d. the quantity used is fixed in the long run but varies in the short run.

4. If the average product of labor when 5 workers are employed is 10, and when 6
workers are employed is 12, then
a. the marginal product curve lies above the average product curve between 5 and 6
workers.
b. the marginal product curve lies below the average product curve between 5 and 6
workers.
c. the total product curve is decreasing between 5 and 6 workers.
d. marginal product is negative.

5. When the total product curve is increasing at an increasing rate,

a. marginal product is positive but declining.
b. average product is zero.
c. the marginal product curve lies below the average product curve.
d. marginal product is positive and increasing.

6. The law of diminishing marginal returns states that as the amount of an input
increases in equal increments, the resulting increments in output
a. will decrease but eventually increase.
b. will eventually be negative.
c. will eventually get smaller.
d. will eventually be constant.

7. Diminishing marginal returns is

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a. true only when moving along an isoquant.

b. applicable to agriculture but not to manufacturing.
c. applicable when making long-run plans.
d. applicable whenever one or more inputs are held constant.

8. On a given isoquant,
a. the well being of the manager is held constant.
b. output is held constant.
c. capital is held constant.
d. capital and labor increase proportionately.

9. Technological change will affect

a. a movement along an isoquant.
b. a movement along a total product curve.
c. a shift in the total product curve.
d. greater economies of scale.

10. The slope of an isoquant measures

a. the marginal rate of substitution.
b. returns of scale.
c. diminishing marginal returns.
d. the ratio of the marginal products.

11. One possible factor that may give rise to increasing returns to scale is
a. specialization of labor.
b. increasing marginal productivity of labor.
c. concave isoquants.
d. the managerial function.

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12. In Figure 7-1, the ray from the origin is tangent to the total product curve at point A.
We know that when L1 workers are employed,
a. the average product of labor exceeds the marginal product of labor.
b. the marginal product of labor exceeds the average product of labor.
c. the average product of labor equals the marginal product of labor.
d. We need more information to say anything about either average or marginal
product of labor.

APL = slope of line from point A to the origin = MPL = slope of tangent at point A

13. Suppose 5 laborers working on 10 acres of land are able to produce 4,000 bushels of
corn, and 6 laborers working on 12 acres of land produce 5,000 bushels of corn.
Production is characterized by
a. increasing returns of scale.
b. constant returns to scale.
c. decreasing returns to scale.
d. diminishing marginal returns.

Inputs (laborers and acres of land) have increased by 20%, but output has increased by 25%.

14. Diminishing marginal returns is a _____short__________-run concept while

decreasing returns to scale is a ____long___________-run concept.

Diminishing marginal returns occurs when at least one input is fixed, so it must be a short-run
concept.
Returns to scale is about changing all inputs proportionally (by the same percent) and checking

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whether output changes by the same percent (constant returns to scale), by a bigger percent
(increasing returns to scale) or by a smaller percent (decreasing returns to scale).

15. A Cobb-Douglas production function exhibits constant returns to scale when

a. b = 1 and c = 1.
b. b + c = 1.
c. b - c = 1.
d. either b = 1 or c = 1.

IGNORE

16. Suppose a Cobb-Douglas production function has the following values: a = 100; b =
0.6; c = 0.5. Then
a. labor and capital exhibit diminishing marginal returns and the production function
exhibits increasing returns to scale.
b. labor and capital exhibit diminishing marginal returns and the production function
exhibits decreasing returns to scale.
c. labor does not exhibit diminishing marginal returns, capital exhibits diminishing
marginal returns, and the production function exhibits decreasing returns to scale.
d. we cannot say whether labor or capital exhibit diminishing marginal returns or not,
but the production function exhibits constant returns to scale.

IGNORE

Discussion Questions and Problems

Questions 1 - 4 use the following data.

Bushels of Corn per year

Number of acres
cultivated per Workers employed per year
year 1 2 3 4 5 6

1 50 150 275 375 450 500

2 150 370 550 700 825 900
3 240 500 740 940 1080 1160
4 300 660 920 1060 1190 1270
5 330 790 1050 1160 1250 1320
6 340 900 1050 1250 1300 1330

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1. Using the above production function for corn, complete the following table:

Amount Total Average product Marginal product

of land Workers output of labor of labor

3 0 0 - -
3 1
3 2
3 3
3 4
3 5
3 6

ANSWER

workers land TP APL MPL

0 3 0
1 3 240 240.00 240
2 3 500 250.00 260
3 3 740 246.67 240
4 3 940 235.00 200
5 3 1080 216.00 140
6 3 1160 193.33 80

2. In Figure 7-2(a), draw the total product curve for labor when the amount of land used
is 3 acres. In Figure 7-2(b), draw the average product and marginal product curves.
Be sure you indicate the quantities on the axes.

Do It Yourselves

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3. Suppose a farmer uses 1 worker and 1 acre of land. Over time, he expands
production by increasing the use of both inputs proportionately. Does the farmer
experience increasing, constant, or decreasing returns to scale as he expands?

If the farmer increases the inputs by the same percent (proportionally), then the relevant
outputs are the output levels that lie on the diagonal I copy and paste the first Table below.

Bushels of Corn per year

Number of acres
cultivated per Workers employed per year
year 1 2 3 4 5 6

1 50 150 275 375 450 500

2 150 370 550 700 825 900
3 240 500 740 940 1080 1160
4 300 660 920 1060 1190 1270
5 330 790 1050 1160 1250 1320
6 340 900 1050 1250 1300 1330

I can then make another Table to calculate the percent change in both inputs as follows:

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% change
workers =% TP along
workers land change land diagonal % change TP
0
1 1 50
2 2 100% 370 640%
3 3 50% 740 100%
4 4 33.33% 1060 43.24%
5 5 25% 1250 17.92%
6 6 20% 1330 6.4%

There is increasing returns to scale up to the fourth unit of inputs (4 labor, 4 capital) since the
percent change in output is greater than the percent change in inputs up to the fourth unit of
inputs.
There is decreasing returns to scale after the fourth unit of inputs since the percent change in
output is smaller than the percent change in inputs until the fourth units of inputs.

4. If the quantity of land is held constant at 3 acres, when do diminishing marginal

returns for labor set in?

At 3 acres of land, output levels are shown in red

Bushels of Corn per year

Number of acres
cultivated per Workers employed per year
year 1 2 3 4 5 6

1 50 150 275 375 450 500

2 150 370 550 700 825 900
3 240 500 740 940 1080 1160
4 300 660 920 1060 1190 1270
5 330 790 1050 1160 1250 1320
6 340 900 1050 1250 1300 1330

To find out the level at which diminishing returns for labor sets in, you will need to find the
marginal product of labor at the different number of workers employed, but with acres of land
fixed at 3. Now construct the following table:

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#
Worker
Acres s Output MPL
3 1 240 240
3 2 500 260
3 3 740 240
3 4 940 200
3 5 1080 140
3 6 1160 80

From the above constructed Table MPL starts to diminish with the third worker.

Use the following table to answer questions 5 and 6.

Labor Capital Output

10 90 100
20 70 100
30 55 100
40 45 100
50 36 100
60 29 100
70 25 100

5. a. On Figure 7-3, draw the relationship between labor and capital given in the table.

Do it Yourselves

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b. What do we call this figure?

We call this figure an indifference curve

c. What is the MRTSLK when labor goes from 30 to 40 workers?

From the Table MRTS = change in K/change in L = -10/10 = -1

d. What is the MRTSLK when labor goes from 60 to 70 workers?

From the Table MRTS = change in K/change in L = -4/10 = -0.4

e. If the marginal product of the fiftieth laborer is 9, what is the marginal product of
capital when the thirty-sixth unit of capital is employed?

From the Table MRTS = change in K/change in L = -0.9

We also know that MRTS = MUl/MUk and also given that MUL=9
So rearranging the equation,

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Muk = MPl/MRTS = 9/0.9 = 10

6. Draw an isoquant for 50 units of output if constant returns to scale apply. Draw
another isoquant for 120 units of output.

Do it Yourselves

7. Suppose an isoquant is a straight line with a slope of -1. What does this imply about
the marginal rate of technical substitution? What does it imply about the marginal
products of the two inputs?

-MRTS is constant along the isoquant

-The marginal products of the two inputs will vary, but their ratio will stay constant

8. The marginal product of labor must fall over time because the labor force is
increasing. Do you agree or disagree? Why?

Disagree. It is not necessary since

a) Technology can improve and counteract diminishing returns

b) The amount of capital (machines, equipment) is also changing
c) Knowledge and skills of the workforce are always improving

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9. Some economists believe that constant returns to scale would prevail if all inputs
could be exactly replicated. If this is true, explain why we observe increasing or
decreasing returns to scale.

See answer provided by the author

10. Distinguish between decreasing returns to scale and diminishing marginal returns.

See answer provided by the author

11. Explain how marginal product and average product can be derived from the total
product curve.

See answer provided by the author

12. In order to produce 20 tons of steel, a firm uses 1,000 laborers, 600 units of capital, 3
acres of land, 25 tons of iron ore, and 30 tons of coal. Suppose the firm expands and
uses 1,500 laborers, 800 units of capital, 6 acres of land, 35 tons of iron ore, and 40
tons of coal to produce 30 tons of steel. Is this a case of constant returns to scale?
Why or why not?

No, this is not a case of returns to scale since the inputs are not changing by the same
percentage. Please See the Table I created below

Output Worker
(steel) s Capital Land Iron Coal
Original 20 1000 600.00 3 25 30
Final 30 1500 800.00 6 35 40
%
change 50% 50% 33.33% 100% 40% 33.33%

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13. You are currently going to college. Consider yourself to be a "firm" utilizing inputs
to produce an output. What is the output? What are the inputs you use to produce the
output? Describe a situation when diminishing marginal returns applies.

Output could be knowledge, skills,

Inputs could be classroom, electricity, paper used, textbooks etc.

An example of a situation when diminishing marginal returns apples is when you increasing
the number of lecture but keeping studying hours at home constant

14. Many firms use suggestion boxes or provide financial bonuses for employees who
suggest a way of operating better. Suppose an employee suggests that the firm rearranges its
floor plan to permit a better flow of materials and people. The firm does so and output
increases by 3 percent without any increase in any of the inputs. Was the firm operating
inefficiently before? How would you show this change using isoquants? Assume the output
before the change was 1,000 units a month.

See answer provided by author

15. Can a production function that exhibits increasing returns to scale also display
diminishing returns?

Yes.

The following question relates to the material in Section 7.6: The Mathematics behind
Production Theory.

16. A production function for wheat is given by W = AL0.6K0.4.

a. Derive the marginal products of labor and capital, and the marginal rate of
technical substitution.

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b. If A = 10, L = 100 and K = 75, find W, MP L, MPK, and MRTS. Do the same
assuming L = 200 and K = 150.

c. If A increases to 20, what happens to W? What could cause such a change?

IGNORE

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SOLUTIONS
True/False

1. False.
2. True.
3. False.
4. False.
5. True.
6. False.
7. False.
8. False.
9. True.
10. True.

Multiple Choice/Short Answer

1. b
2. Efficient
3. c
4. a
5. d
6. c
7. d
8. b
9. c
10. d
11. a
12. c
13. a
14. short; long
15. b
16. a

Discussion Questions and Problems

1.
Amount Total Average product Marginal product
of land Workers output of labor of labor
3 0 0 -- --
3 1 240 240 240
3 2 500 250 260
3 3 740 247 240
3 4 940 235 200
3 5 1,080 216 140
3 6 1,160 193 80

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2. See Figure 7-4.

3. There are increasing returns to scale up through 4 units of each input and decreasing returns
to scale after that.

4. Diminishing marginal returns set in when the third worker is used.

5. a. See Figure 7-5.

b. Isoquant

c. (55 - 45)/(30 - 40) = -l

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d. (29 - 25)/(60 - 70) = (-)4/10 = (-)0.4

e. MRTS = (45 - 36)/(40 - 50) = (-) 0.9.MRTS = MPL/MPK, so 0.9 = 9/MPK.

Thus MPK = 9/0.9 =10.

6. See Figure 7-5.

7. The MRTS is constant at all points on the isoquant. The ratio of the marginal products is
constant too.

8. Disagree. Many other things can be happening too. Technical change may alter the
production function, the capital stock may increase, education levels may change, etc.

9. When a firm expands, it generally does not exactly replicate all existing inputs. Instead,
different types of capital may be employed that actually may alter the capital-labor ratio. That
is, all inputs are not increasing proportionately. The movement to large-scale production will
cause increasing returns to scale initially. When management becomes too spread out,
decreasing returns to scale set in.

10. Decreasing returns to scale occur when a proportionate increase in all inputs results in a less
than proportionate increase in output. It is a long-run concept. Diminishing marginal returns
occur when adding equal increments of an input to a fixed amount of another input result in
smaller additions to output. It is a short-run concept.

11. Average product is found by taking a line (ray) from the origin to a point on the total product
curve. The slope of the line is the average product of labor associated with that point.
Marginal product is found by the slope of a line tangent to the point on the total product
curve. Figure 7.2 on page 181 in the text provides a graphical representation of this concept.
12. No. To determine whether scale economies exist or not, all inputs must be changed by the same
percentage. In this case, output increased by 50 percent, laborers by 50 percent, capital by 33

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percent, land by 100 percent, iron ore by 40 percent, and coal by 100 percent.

13. Output could be defined as the knowledge gained by going to college or by the diploma. Inputs
include the faculty, classrooms, paper, books, the library, computers, land the college is on, as
well as you. Diminishing marginal returns would apply whenever you try to increase your rate
of output without increasing all inputs proportionately, e.g., attending class more frequently
while holding studying time constant.

14. No. The firm was operating the best way it knew before the suggestion. The suggestion resulted
in a change in technology. An isoquant labeled Q = 1000 before the suggestion is now labeled
Q = 1030.

15. Yes. Increasing returns to scale are present when all inputs are increased proportionately and
output increases by a greater percentage. Diminishing returns occurs when at least one input is
held constant.

16. a. MPL = W/L = 0.6AL-0.4K0.4 = 0.6A (K/L).4

MPK = W/K = 0.4AL0.6K-0.6 = 0.4A (K/L)-0.6

MRTS = MPL/MPK = (0.6A (K/L)0.4)/(0.4A(K/L)-0.6) = 1.5(K/L)

b. W = 10(100)0.6(75)0.4 = 891.3

MPL = 0.6(10)(75/100)0.4 = 5.348

MPK = 0.4(10)(75/100)-0.6 = 4.754

MRTS = 1.5(75/100) = 1.125

W = 10(200)0.6(150)0.4 = 1782.6

MPL = 0.6(10)(150/200)0.4 = 5.348

MPK = 0.4(10)(150/200)-0.6 = 4.754

MRTS = 1.5(150/200) 1.125

c. W = 20(200)0.6(150)0.4 = 3565.2

Technology must have changed since neither labor nor capital changed and output increased.

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