6. You are an efficiency expert hired by a manufacturing firm that uses K and L

Question

6. You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. rw-340, r = $ 100, MPL-4, and MPX-40 the firm: A. is cost minimizing. B. should use less L and more K to cost minimize. C. should use less K and more L to cost minimize. D. is profit maximizing but not cost minimizing. For a cost function C- 100 50Q-110 Answer 7 & 8 Total Fixed cost is 7. A. 100 B. 50 D. None of the above Average variable cost is the minimum at an output of A. 100. 8. C. 3.67. D. 5.5

Explanation / Answer

6. w= $40 , r= $100

MPL = 4 , MPK = 40

And cost minimising condition is where MPL/ MPK = w/r

4/40 = 40/100

Now, this cost minimising condition will satisfied when the firm should use Labor(L) and more capital(K) then MPL increases and MPK decreases. .

Therefore, option (B) is correct i.e, should use less L and more K to cost minimize.

C= 100 + 50Q -11 Q2 + Q3

7. Total fixed cost can be calculated by putting Q=0 ,

TFC = 100

Therefore, option (A) is correct.

8. Now , firstly calculate total variable cost (TVC)

TVC = TC- TFC

TVC=(100+ 50Q -11Q2 + Q3) -100

TVC = 50 Q - 11Q2 + Q3

AVC = TVC/Q

AVC = (50Q -11Q2 +Q3 )/Q

AVC = 50 - 11Q +Q2

Now to minimise AVC , differentiate AVC with respect to Q and equate it equal to 0.

Change in AVC/ Change in Q = -11 + 2Q = 0

2Q = 11

Q = 5.5

Therefore, AVC is the minimum at an output of 5.5 . Option(D) is correct.

  

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.