After two quarters of increasing levels of production, the CEO of Canadian Fabrication & Design was upset to learn that, during this time of expansion, productivity of the newly hired sheet metal workers declined with each new worker hired. Believing that the new workers were either lazy or ineffectively supervised (or possibly both), the CEO instructed the shop foreman to "crack down" on the new workers to bring their productivity levels up. Explain carefully in terms of production theory why it might be that no amount of "cracking down" can increase worker productivity at CF&D. Provide an alternative to cracking down as a means of increasing the productivity of the sheet metal workers.

Answer 1

Q1 discuss the law of diminishing returns (the marginal benefit of adding a productive resource must, at some point, decline.)
Q2, discuss returns to scale. Increasing all factors of production by x% COULD raise output by x%.

Answer 2

The Teenager Company makes and sells skateboards at an average price of $70 each. During the past year, they sold 4,000 of these skateboards. The company believes that the price elasticity for this product is about -2.5. If it decreases the price to $63, what should be the quantity sold? Will revenue increase? Why?