a. On Isoquant level 1 (in red), the total cost (TC) is: ________________. (3 pt

Question

a. On Isoquant level 1 (in red), the total cost (TC) is: ________________. (3 pts)

The amount of L used in production is: _______________. (3 pts)

b. On Isoquant level 3 (in red), the total cost (TC) is: ________________. (3 pts)

Assume that Level 3 produces a total of 2,000 mugs. The average total cost (ATC) per mug is: ____________. (3 pts)

c. As a result of b., if the total fixed cost (TFC) for this production is $4,000, what is the average variable cost (AVC) per mug? Explain. (3 pts)

d. Briefly explain why the short-run expansion path (in green) is 'flat' (horizontal), rather than as an upward-sloping locus of long-run expansion path. (5 pts)

e. Briefly explain why, theoretically, a company will expect to have a upward-sloping, origin-starting, expansion path in the long run.

The following graph contains isoquants and isocosts and their equilibriums for a coffee mug company 280 200 Expansion Path (Long Run,) Expansion 100 3 Path Short Run) 340 120 The vertical axis measures the amount of capital (K) used in production; the horizontal axis measures labor (L). Both of the unit price of K and L are $50. Please show your analytical work when applicable.

Explanation / Answer

a) TC= 50L +50K = 50. 80+ 50.50= $6500

80 units of labour is used

b) TC = 50. 120 + 50. 100= $11,000

ATC= TC/Q= 11000/ 2000= 5.5

c) AFC =TFC/Q = 4000/ 2000= 2

AVC = ATC -AFC = 5.5-2= 3.5

d) It is flat because capital is fixed in short run.

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