Answer:
(a) What do you mean by production function? Distinguish between a short
period and a long period production function.
A production function is simply a function that describes the relation between input and output, input is the raw materiales or the intermediate goods that are used in the production process, and output is the finished goods.
A short period production function fixes all the variables except for one, while a long period production function allows for changes in all the variables.
(b) Explain the basis of increasing returns to scale.
Increasing returns to scale occurs when output increases more in proportion to input. That is to say, when the production process reaches a point in which for the same amount of input, more finished goods are produced.
(c) Why has welfare Economics accepted perfect competition as a desirable ideal?
Because perfect competition allows for minimum prices and maximum production, due to the internal structure and functioning of the system. While all other market structures lead to less than optimal outcomes due to excessive market power either from buyers or sellers, in perfect competition market power does not exist, and as a result, the market mechanism is allowed to function properly leading to the best possible outcome.
