https://docs.google.com/document/d/1hAIYqwofKpJRuoH6qDUqF51QMEt-HJ9B8lOXYiGMr-8/

Question

https://docs.google.com/document/d/1hAIYqwofKpJRuoH6qDUqF51QMEt-HJ9B8lOXYiGMr-8/pub

1) Referring to the diagram, answer the following question. Assume that the manager has 3000 units of capital in the short run. Assume that price of L is 100 per unit and of K is 500 per unit.

a) For input combination “A”, MPK/r is _______ than MPL/w. Explain.

b) Why is the short run expansion path horizontal at K = 3000?

c) What is the short run average cost of producing 20,000 units?

d) What is the long run average cost of producing 20,000 units?

2) Suppose TC = 1000 + 10Q + Q^3, find the formula for TFC, TVC, ATC, AFC, AVC, and MC.

3) You are tasked with manufacturing 12 commercial aircraft per month. A new OSHA rule requires that welders be given 2 hour break for every 2 hours of work to prevent carpel tunnel syndrome. Using the isoquant-isocost graph as an aid, explain what will happen to the capital-labor ratio (K/L) in BOTH the short run (when capital is fixed) and the long run (when capital can change). Illustrate your answer using the isoquant/isocost diagram. (Comment: Don’t try to answer this question just off the top of your head, but think it through carefully using graphs to help your analysis.) Hint: Think of the new rule as a negative change in technology.

4) Discuss the relationship between the short run average cost curve and the long run average cost curve.

Explanation / Answer

2) TC = 1000 + 10Q + Q3

TFC = It is the cost which occured even at zero level of output = 1000 + 10(0) + (0)3 = 1,000

TVC = It is the cost which changes with the change in the output. = 10Q + Q3

ATC = TC/Q = 1000/Q + 10 + Q2

AFC = TFC/Q = 1,000/Q

AVC = TVC/Q = 10 + Q2

MC = Change in the TC due to change in output = derivative of TC with respect to Q = 10 + 3Q2

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