Chapter 07 - Technology and Production

Part III: Production Decisions

Chapter 7: Technology and Production

Main Concepts and Learning Objectives

This chapter focuses on production. The chapter begins with analysis of short-run
production functions with one variable input. The chapter then uses the skills that were
developed in Chapter 4 (utility maximization) to analyze long run output maximization
with two variable inputs. This analytical framework is used to analyze returns to scale,
productivity and technological change.

Students who master the material presented in this chapter will be able to:
• Define production efficiency
• Apply the skills developed for analyzing individual decisions (to combine goods to
produce utility (summarized in the budget line / indifference curve graph)) to analyze
firm decisions to employ inputs to produce output.
• Correctly draw and position average product and marginal product on the same graph.
• Use information about marginal products to determine whether a resource has been
allocated efficiently to two competing uses.
• Use the concept of Marginal Rate of Technical Substitution to analyze production
input decisions.
• Use information about a Cobb Douglass production function to analyze returns to
scale

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Chapter 07 - Technology and Production

Multiple Choice Quiz (10 questions) covering main points:

1. A strategy for deploying inputs to produce output is inefficient if

a. it would be possible to replace some of the workers with machinery or electronic
equipment.
b. it is possible to produce more output with the same inputs by organizing or deploying
the same inputs in a different manner.

2. A firm’s production function is Q = 2KL, where K is the number of square feet of

workspace and L is the number of man hours available to produce output. Which of the
following statements is correct?
a. With 1000 square feet, 3 workers can produce 6,000 items.
b. With 2000 square feet, 5 workers can produce 6,000 items
c. With 1000 square feet, 5 workers can produce 10,000 items
d. Both a and c.

3. The Law of Diminishing Marginal Returns can be described as the Law of Eventually
Diminishing Returns because it states that
a. marginal product of the variable input decreases at every possible value of the variable
input..
b. marginal product of the variable input eventually begins to decrease as the quantity of
the variable input is increased.
c. marginal product of the fixed input eventually begins to decrease as the quantity of the
variable input is increased.
d. none of the above

4. Sally has two art projects due tomorrow. She has 5 hours to complete both projects.
She plans to spend 3 hours working on the first project and 2 hours working on the
second project. She believes that the last minute spent working on the first project will
add 3 points to Project # 1 score, and the last minute spent working on the second project
will add 20 points to the Project # 2 score. Which of the following statements is
accurate?
a. Assuming that Sally’s goal is to maximize the total number of points, Sally’s plan will
allocate her time efficiently.
b. Sally would earn a higher point total if she increased the time allocated to Project # 1.
c. Sally would earn a higher point total if she decreased the time allocated to Project # 1.
d. None of the above

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Chapter 07 - Technology and Production

5. If MPL = 7 and MPK = 4, then MRTSLK is equal to

a. 7/4
b. 4/7
c. 4*7
d. none of the above

6. For any Cobb Douglas production function, MRTS =

a. α AL(α-1) Kβ
βALα K(β-1)
b. ALα Kβ
ALα Kβ
c. Neither of the above

7. Suppose an industry is dominated by a large monopolist. If this industry exhibits

increasing returns to scale,
a. splitting the large monopolist into several small competitive firms would increase
efficiency.
b. splitting the large monopolist into several small competitive firms would decrease
efficiency
c. splitting the large monopolist into several small competitive firms would not affect
efficiency
d. None of the above.

8. Syverson analyzed concrete plant efficiency, and found large efficiency differences
across plants. Which of the following provide potential explanations for the fact that all
plants are not equally efficient?
a. The data might fail to capture differences in the quality of inputs used in the plants.
b. Workers at different plants might have different levels of experience.
c. Owners and managers might have different levels of ability for organizing production.
d. All of the above.

9. Benkard analyzed production data for the L-1011 airplane. He found that
a. worker marginal product increased as the workers gained experience by building more
airplanes.
b. Some of the productivity gains were lost when the airplane design was modified.
c. Both of the above
d. None of the above.

10. Technological change

a. can make either labor or capital more productive
b. always increases the MP of capital
c. does not impact MRTS
d. none of the above

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Chapter 07 - Technology and Production

Answers to Multiple Choice Quiz

1. b
2. d
3. b
4. c
5. a
6. a
7. b
8. d
9. c
10. a
Additional examples

The name of the law firm in Exercise 7.1 contains humor. This is part of the sign-off for
the popular Public Radio talk show, Car Talk. Ignore the spelling & say it out loud to
“get” the joke.

Henry Ford’s assembly line design concept included the requirement that no assembly
line worker should have to move more than two feet up, down or sideways in order to do
his job.

Alfred Chandler's book, The Visible Hand, provides a fascinating account of the
transformation of American business during the 1800's. New technology and
transportation improvements radically altered firm production functions.
Potential student learning issues

It may be helpful to be sure that students can clearly see that the budget lines and
indifference curves are a special case of the more general case of production with two
variable inputs. It might also be helpful to note that the case of two variable inputs could
arise in two different situations:
• In the long run, labor and capital are both variable inputs.
• In the short run, with capital fixed, labor and energy might be two variable inputs.
In this case, capital is a parameter in the production function.

Before assigning In-Text Exercise 7.6, it may be helpful to ensure that students
understand that “marginal product” refers to the marginal product of the last increment
when – as in In-Text Exercise 7.6 – the smallest possible increment is 500 square feet.
The text clearly makes this point, but additional emphasis may be helpful.

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Chapter 07 - Technology and Production

Answers to In-Text Questions

7.1
Number of Assembly Garden Chairs
Production Method Workers Produced per Week Efficient?
A 2 24 No
B 2 36 Yes
C 3 30 No
D 3 44 Yes
E 3 24 No

Method B is efficient because it produces the most garden chairs with 2 workers. Method
D is also efficient because it creates the greatest number of chairs with 3 workers.

7.2
If Q = F(L) = 25L, then F(1) = 25(1) = 25, F(2) = 25(2) = 50, F(3) = 25(3) = 75, and
finally F(4) = 25(4) = 100. Two drawings of this production function are below. On the
left, the number of workers is not divisible (workers must be hired for the entire week),
on the right, the number of workers is finely divisible (workers may be hired for fractions
of a week).

If the production function was Q = F(L) = L ,

then F(1) = 1 = 1, F(2) = 2 = 1.414, F(3) =
3 = 1.732, and F(4) = 4 = 2.

The production function for the case where

workers are finely divisible is shown to the
right.

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Chapter 07 - Technology and Production

7.3
When K is fixed at 10 units, the short run production function is
F ( L, K ) = Q = 10 L 10 , which students may write as 10 10 L or 31.623 L .

Simply plugging 1, 2 and 3 into the short run production function yields the following:
F (1,10) = 10 1 10 = 32.623
F (2,10) = 10 2 10 = 44.721
F (3,10) = 10 3 10 = 54.772

7.4
This is the first pair of graphs, used to derive APL.

This is the second pair of graphs, used to derive MPL.

The last graph, below, shows the relationship between the APL and MPL for this
production function. They are equal. This makes sense, because the production function
suggests that for every 1 unit increase in L, there is a 25 unit increase in Q. This means
that every worker is exactly the same—they are all average workers. And since they are
all the same, every next worker is also average.

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Chapter 07 - Technology and Production

7.5
The first step is to write the marginal product in plant 2 as a function of the number of
crates of oranges assigned to plant 1, O1:

MP2O = 1200 – 2O2

MP2O = 1200 – 2(700 – O1)
MP2O = 1200 – 1400 + 2O1
MP2O = 2O1 – 200

Then find the level of O1 that equates the marginal product of oranges in each plant. Set
MP1O = MP2O and solve for O1.

MP1O = MP2O
1,000 – O1 = 2O1 – 200
1,200 = 3O1
O*1 = 400

Therefore, they should allocate 400 crates of oranges to plant 1 and the rest (300 crates of
oranges) to plant 2.

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Chapter 07 - Technology and Production

7.6
The formula for marginal product given on page 218 will be most helpful here. When
calculating the marginal product of labor in the case of more than one input, all other
inputs need to be held constant. We must rewrite this formula to have two inputs:

∆Q F ( L, K ) − F ( L − ∆L, K )
MPL = =
∆L ∆L

Since we want to know about the marginal product of the third worker (L = 3) and ∆L is
given as 1, we can re-write the formula for MPL as:

F (3, K ) − F (3 − 1, K )
MPL of the third worker = = F (3, K ) − F (2, K )
1

This makes things very simple. Now, we just calculate MPL of the third worker for the
three different garage sizes (the three different values of K):

Garage size, K F(3,K) F(2,K) MPL = F(3,K) – F(2,K)

1,000 sq. ft. 111 74 37
1,500 sq. ft. 140 105 35
2,000 sq. ft. 167 130 37

Calculating MPK is very similar:

∆Q F ( L, K ) − F ( L, K − ∆K )
MPK = =
∆K ∆K

Using 1,500 square feet of garage space, ∆K = 500 and L = 4 workers:

F (4,1500) − F (4,1500 − 500) F (4,1500) − F (4,1000)

MPK = =
500 500
170 − 132 38
MPK = =
500 500
MPK = 0.076

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Chapter 07 - Technology and Production

7.7
The production function Q = F(L,K) = (L + K)2 is not Cobb-Douglas, so we cannot
simply look at exponents to determine returns to scale. Be careful that students correctly
FOIL this function out if they are looking to simplify it. The simplest way to do this
problem is as in Worked-Out Problem 7.2, by considering what would happen if the firm
were to double its inputs of labor and capital from L and K to 2L and 2K.

F(L, K) = (L + K)2
F(L, K) = L2 + 2KL + K2

F(2L, 2K) = (2L + 2K)2

F(2L, 2K) = 4L2 + 8KL + 4K2
F(2L, 2K) = 4 × [L2 + 2KL + K2]
F(2L, 2K) = 4 × F(L, K)

Since doubling both inputs more than doubles output (in fact, here it quadruples it), this
firm experiences increasing returns to scale.
Answers to End-of-Chapter Questions

7.1
In order to graph a production possibilities set, we need to have a standardized measure
of output, like claims per hour, claims per day, or claims per week. In the solution that
follows, I will calculate claims per eight hour work day. The different methods of
production available to this firm involve combinations of lawyers using the three
different break schedules. First we need to calculate how many claims a lawyer could
process under each break schedule in an eight hour work day. We start by calculating
how long it takes to process one claim:
Break schedule (1): 6 hours, plus 3 breaks = 6 + 3(20)/60 = 7 hours/claim
Break schedule (2): 8 hours, plus 2 breaks = 8 + 2(20)/60 = 8.667 hours/claim
Break schedule (3): 5 hours, plus5 breaks = 5 + 5(20)/60 = 6.667 hours/claim

To figure out the number of claims processed in an eight hour work day with each break
schedule, we divide each time above into eight hours:
Break schedule (1): 8 / 7 = 1.143 claims per eight hour work day
Break schedule (2): 8 / 8.667 = 0.923 claims per eight hour work day
Break schedule (3): 8 / 6.667 = 1.200 claims per eight hour work day

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Chapter 07 - Technology and Production

Then, we define some different production methods (to follow the chapter’s
methodology). Student methods may vary, but here’s a complete set of methods with one,
two and three workers on varying schedules (efficient methods in bold):

Total Lawyers on Lawyers on Lawyers on Claims processed

Method lawyers schedule (1) schedule (2) schedule (3) per work day
A 1 1 0 0 1.143
B 1 0 1 0 0.923
C 1 0 0 1 1.2
D 2 2 0 0 2.286
E 2 0 2 0 1.846
F 2 0 0 2 2.4
G 2 1 1 0 2.066
H 2 1 0 1 2.343
I 2 0 1 1 2.123
J 3 3 0 0 3.429
K 3 0 3 0 2.769
L 3 0 0 3 3.6
M 3 1 1 1 3.266
N 3 2 1 0 3.209
O 3 2 0 1 3.486
P 3 1 0 2 3.543
Q 3 0 1 2 3.323
R 3 1 2 0 2.989
S 3 0 2 1 3.046

The graph of this production possibilities set would look like the one below. This one
contains all of the possible methods for one, two or three workers, but your students don’t
necessarily have to include every method. Also, this one is stretched out so the instructor
can see each method. The efficient method for each number of workers is at the top and is
indicated by a larger grey circle with a black border.

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Chapter 07 - Technology and Production
4

L
P The production function is an
3.5 O
equation that gives output as a
J
Q function of inputs using only efficient
M
N methods of production. Therefore, the
S
relevant production function here
3 R would only include methods C, F and
L for one, two and three workers
K
respectively. Looking at the table we
Claims per eight hour work day

created, we notice that methods C, F

2.5 and L all involve only using break
F
H schedule (3). This makes sense
D because workers on break schedule
I (3) process more claims in a day (or,
G
2 similarly, they use less time in the
E
processing of one claim).

So the only break schedule that

should be used is (3). This means that
1.5
every worker will be able to process
1.2 claims per eight hour work day,
C
A
and that the production function
would look like: Q = F(L) = 1.2L,
1 where Q is number of claims per
B
eight hour work day and L is the
number of lawyers hired to work
eight hour days.
0.5
Remember that students may use a
different definition of Q, so answers
may vary. Some possibilities include
0 Q = .15L, where Q is the number of
0 1 2 3 claims per hour and L is number of
lawyer hours, or Q = 6L, where Q is
Number of workers the number of claims per week and L
is the number of lawyers hired to
work for a week.

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Chapter 07 - Technology and Production

7.2
Their production function is a
straight line with a slope of 10
like the one drawn below.

7.3
Students should recall that MPL is equal to the change in output divided by the change in
labor. Since we are increasing labor by one unit here, it is simply the change in output
caused by the unit of labor in question. The APL is output divided by labor.

Number of Garden Benches

Assembly Workers Produced per Week MPL APL
0 0 — —
1 35 35 35
2 70 35 35
3 99 29 33
4 112 13 28

The relationship between MPL and APL satisfies the properties discussed in section 7.2.
When MPL is constant, APL is constant and equal to MPL (see the rows for one and two
workers above), but when MPL falls below APL, the APL begins to fall (see the rows for
three and four workers above).

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7.4
To use information about APL to find out about MPL, we must first use the APL
information to find out about total output. Since APL = Q/L, then we also know that
Q = APL × L . If we use this formula to find Q, we can then find MPL in the usual way.

Hours worked, L APL Q = APL × L MPL

0 — 0 —
1 5 5 5
2 4 8 3
3 3 9 1
4 2.5 10 1
7.5
Theoretically, the marginal product of labor can be negative. A negative MPL implies that
total output decreases with an additional unit of labor. If workers are so numerous that
they begin to get in one another’s way or they become too hard to manage, this could be
true. In practice, however, we never have to be concerned with this situation because a
firm would not hire a worker if the MPL was negative. Why would the firm pay a worker
to reduce production? As long as firms are profit-maximizers and workers have a non-
negative wage, this situation will not arise. (If firms are forced to hire workers with a
negative MPL, in the case of a contract for example, a negative MPL would still never
happen in practice because the counter-productive worker could be told to sit in the
public library, where he or she would not exert a negative impact on production.)

7.6
If the production function is Q = F ( L, K ) = L × L + K and K is fixed at 10 units in the
short run, then the short run production function is Q = F ( L, K ) = L × L + 10 . To find
the output at one, two and three workers, we just plug these numbers into the production
function.

When L = 1, short run production equals 1 × 1 + 10 = 11 = 3.317 .

When L = 2, short run production equals 2 × 2 + 10 = 2 12 = 6.928 .
When L = 3, short run production equals 3 × 3 + 10 = 3 13 = 10.817 .

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7.7
First we need to construct an expression for APL, which we do by dividing Q by L:
Q L3 − 200 L2 + 10,000 L
APL = = = L2 − 200 L + 10,000
L L

Then, to find where APL and MPL are equal, we set them equal to each other and solve
algebraically for L.

APL = MPL
L2 – 200L + 10,000 = 3L2 – 400L + 10,000
0 = 2L2 – 200L
0 = L2 – 100L

In most applications, dividing by L in the next step causes us to “lose a root,” namely 0.
However, since L = 0 cannot be our solution (there is no APL or MPL at L = 0), we don’t
mind losing this root, so dividing by L is acceptable.

0 = L – 100
L = 100

Therefore, APL and MPL are equal when L is 100. To verify that APL and MPL satisfy the
properties discussed in the text, we should evaluate them both at a level of L less than 100
and a level of L greater than 100. Using the formulas above, we can get results like the
ones that follow. (Students’ methods may vary greatly here, but they should be trying to
investigate how APL and MPL behave when not equal.)

L APL MPL
90 100 -1,700
95 25 -925
100 0 0
105 25 1,075
110 100 2,300

Although the MPL oddly starts negative, then becomes positive, we notice that the
relationship between the APL and MPL makes sense here. At L = 90 and L = 95, the MPL
is less than the APL and the APL is falling (compare it to when L = 95 and L = 100). After
L = 100, the MPL is greater than the APL, and the APL is rising.

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7.8
The first step is to write the marginal product in plant 2 as a function of the number of
crates of oranges assigned to plant 1, O1:

MP2O = 1200 – 2O2

MP2O = 1200 – 2(8500 – O1)
MP2O = 1200 – 1700 + 2O1
MP2O = 2O1 – 500

Then find the level of O1 that equates the marginal product of crates of oranges in each
plant. Set MP1O = MP2O and solve for O1.

MP1O = MP2O
1,000 – O1 = 2O1 – 500
1,500 = 3O1
O*1 = 500

Therefore, they should allocate 500 crates of oranges to plant 1 and the rest (350 crates of
oranges) to plant 2.

7.9
Starting with the first worker, each worker should be assigned to the plant where his or
her marginal product is highest. In practice, this will usually involve assigning some
workers to both plants. Specifically, the manager will distribute the fixed number of
workers between both plants in a way that makes the marginal product of labor equal at
both plants. If by saying “plant B is more productive than plant A” means that, at every
given level of labor, plant B is more productive than plant A, then this will definitely
involve assigning more workers to plant B. Diminishing marginal product will require
that plant B, having higher marginal product at each level of L, have more workers in
order to lower its marginal product of labor to be equal to that of plant A. It could be,
given the amount of available L and the different marginal product functions, that all of
the labor should be assigned to plant B. Resources will always go where they are most
productive, so there is no case, interpreting the conditions given in this question correctly,
in which plant A should receive more workers.

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Chapter 07 - Technology and Production

7.10
You should allocate each minute where it does the most good. Let’s define marginal
productivity of study time as additional points earned per hour. We can arrange the
information from this problem as follows:

Marginal Marginal
Hours spent Productivity of Hours spent Productivity of
studying micro studying micro studying macro studying macro
0 – 25 1 0 – 15 1.333
26 – 100 .333 16 – 60 .667

(Notice that the most time you can spend studying for macro is 60 hours, this is because
there are only 50 points on each part of the test, so studying more than 60 hours for
macro does not raise your score.)

The highest marginal productivity is for the first 15 hours of macro study time, so your
first 15 hours of study time go to that. This earns you 20 extra points on the macro
section of your test. After that, the next highest marginal productivity is for the first 25
hours of studying for micro, so your next 25 hours go to studying micro. This earns you
25 points on the micro part of your test. Next, the third highest marginal productivity is
for the next 45 hours of studying for macro, which earn you 30 more points on the macro
section (for 50 points total on macro). Since there’s no more macro to study, you spend
your last 15 hours studying for micro. These 15 hours earn you an additional 5 points on
that section of the test (for 30 total points on micro).

In summary: study macro for 60 hours and micro for 40 hours. Total score: 80 points.

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7.11
The first step is to write the marginal product in plant 2 as a function of the number of
workers assigned to plant 1, L1:

MP2L = 50/L2
MP2L = 50/(90 – L1)

Then find the level of L1 that equates the marginal product of labor in each plant. Set
MP1L = MP2L and solve for L1.

MP1L = MP2L
100/L1 = 50/(90 – L1)

Cross multiply to get:

9000 – 100L1 = 50L1

9000 = 150L1
L1 = 60

Therefore, Beta Inc. should allocate 60 workers to plant 1 and the rest (30 workers) to
plant 2.

7.12
Since half of the store’s customers refuse to use the new machines, then 100 customers
per hour (when output is fixed at 200 customers per hour) will require a checkout clerk.
Since checkout clerks can each checkout 20 customers per hour, the minimum number of
checkout clerks (not counting those needed to monitor the self-scan machines) is five.
The maximum number of customers that will use the self-scan machines is 100. Forty of
them take 3 minutes each, requiring 120 self-scan machine minutes. Since we’re
interested in servicing these 40 customers in one hour, we would need two machines just
for them. Sixty of the customers would take five minutes apiece, requiring 300 self-scan
machine minutes, or 5 machines. The maximum number of machines, then, is 7. These
seven machines require two clerks to monitor them.

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Chapter 07 - Technology and Production

All of the possible ways of checking out 200 customers an hour are summarized below
(assuming that the customers who are best at using the self-scan machines are the first to
use them and that, since clerks can do other productive things if not checking out
customers, we can treat clerk hours as divisible):
(1) Clerk hours Customers using Customers being Clerk hours (2)
Self-scan spent self-scan checked out by spent checking Total
machines monitoring machines clerks customers out clerks
0 0 0 200 10 10
1 0.25 20 180 9 9.25
2 0.5 40 160 8 8.5
3 0.75 52 148 7.4 8.15
4 1 64 136 6.8 7.8
5 1.25 76 124 6.2 7.45
6 1.5 88 112 5.6 7.1
7 1.75 100 100 5 6.75
Q = 200 customers per hour
Columns (1) and (2) above are used to
construct the isoquant shown to the right.
It slopes upwards after seven self-scan 14

machines (data not shown on table above) 12

because no more customers can be helped
by more than seven machines, but each 10
Checkout clerks

additional machine requires another 8

quarter hour of checkout clerk time.
6

0
7.13 0 2 4 6 8 10

No. If the marginal rates of technical Self-scan machines

substitution are not equal, this means that

one input is more productive at one plant and the other input is more productive at the
other plant. I am missing out on opportunities to produce more with the same amount of
inputs. In this case, I should reallocate the resources so that more of each goes where it is
more productive. By doing this, because of the principle of diminishing marginal
productivity, the productivity of these resources will fall at their respective plants and the
marginal rates of technical substitution will get closer together. I will continue this
reallocation until the marginal rates of technical substitution are equal. (This assumes that
resource prices are the same, which is reasonable given the problem’s mention of the two
plants being in the same city.)

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7.14
The relationship between these exponents and returns to scale is the same as it is for the
two-input case discussed in the text. An example like the one given on page 239 makes
this clear. If we double each of the inputs we get:

F(2L, 2K, 2M) = A(2 L) α (2 K ) β (2M ) γ = 2α + β +γ ( ALα K β M γ ) = 2α + β +γ F ( L, K , M )

If α + β + γ = 1, then output exactly doubles, exhibiting constant returns to scale.

If α + β + γ > 1, then output more than doubles, exhibiting increasing returns to scale.
If α + β + γ < 1, then output less than doubles, exhibiting decreasing returns to scale.

7.15
This technological advance doubles the firms output but does not change the relative
productivities of its inputs. Because output has doubled at every combination of its two
inputs, the marginal products of those inputs has also doubled everywhere. MRTS is a
ratio of marginal products, and the doubling of the top and bottom of a fraction leave its
value unchanged. This is a factor-neutral technological change and therefore the MRTS
(the rate at which labor can be substituted with capital) does not change.

7.16
The formula for APL is Q/L. From the story told in the problem, Q doubles at every level
of L, but L does not change. Doubling the numerator of a fraction and leaving the
denominator unchanged doubles the value of the fraction. Therefore, APL would double
for every level of L.

The formula for MPL is change in Q divided by change in L. For every one unit change in
L, the level of output has doubled, and so has the previous level of output. This means
that the change between them has doubled as well. Once again, this change doubles the
numerator but not the denominator, so the value of the fraction doubles. MPL doubles for
every level of L.

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7.17
The condition under which Technology B is more productive than Technology A depends
on how much is going to be produced in total. Suppose that I want to produce Q* units of
output. The technology that can produce my desired output using the fewest units of labor
is the one that is most productive. (I assume that Q* is greater than 300 because if Q* is
equal to or less than 300, then it is obvious that Technology B is the most productive
technology.) To proceed, I must derive an equation for the amount of labor used under
each technology as a function of output.

Technology A Technology B
QA = 2LA QB = 3(100) + β(LB – 100)
LA = QA/2 QB = 300 + βLB – 100β
QB – 300 + 100β = βLB
LB = (QB – 300)/β + 100

In order for Technology B to be more efficient, LB must be less than LA for QA = QB = Q*:

LB < LA
Q * − 300 Q*
+ 100 <
β 2
Q − 300
*
Q*
< − 100
β 2
Q * − 300
<β
Q * − 100
2
⎛ Q * − 300 ⎞
Or, written differently: β > 2 × ⎜⎜ * ⎟⎟ .
⎝ Q − 200 ⎠

As long as this condition is satisfied, then Technology B is more efficient than

Technology A. For example, if I desire to produce 400 units, β must be greater than 1 for
Technology B to be the better choice. Advanced students may notice that the limit of this
critical value of β is 2 as Q* approaches infinity.

Note: students could also solve this problem holding the amount of labor constant at L*
and then solving for β that makes QB greater than QA. Doing so gives a critical value of β
as a function of L* that is similar in form. Again, the limit is 2 as L* approaches infinity.

⎛ L* − 150 ⎞
The solution in this case is: β > 2 × ⎜⎜ * ⎟⎟ .
⎝ L − 100 ⎠

7-20