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True or false: A firm should always produce at an output at which long-run average cost is minimized. Explain.

The menu at Joe’s coffee shop consists of a variety of coffee drinks, pastries, and

Sandwiches. The marginal product of an additional worker can be defined as the number

Of customers that can be served by that worker in a given time period. Joe has been

Employing one worker, but is considering hiring a second and a third. Explain why the

Marginal product of the second and third workers might be higher than the first. Why

Might you expect the marginal product of additional workers to diminish eventually?

Suppose a chair manufacturer finds that the marginal rate of technical substitution of capital for labor in his production process is substantially greater than the ratio of the rental rate on machinery to the wage rate for assembly-line labor. How should he alter his use of capital and labor to minimize the cost of production?


3. Assume the marginal cost of production is increasing. Can you determine whether the average variable cost is increasing or decreasing? Explain.



4. Joe quits his computer-programming job, where he was earning a salary of $100,000 per year to start his own computer software business in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the following expenses: salary paid to himself $40,000, rent, $0, and other expenses $90,000. Find the accounting cost and the economic cost associated with Joe’s computer software business.



5.A recent issue of Business Week reported the following:

During the recent auto sales slump, GM, Ford, and Chrysler decided it was cheaper to sell cars to rental companies at a loss than to lay off workers. That’s because closing and reopening plants is expensive, partly because the auto makers’ current union contracts obligate them to pay many workers even if they’re not working.


6.When the article discusses selling cars “at a loss,” is it referring to accounting profit or economic profit? How will the two differ in this case? Explain briefly.

7.You manage a plant that mass produces engines by teams of workers using assembly machines. The technology is summarized by the production function.

q = 5 KL

where q is the number of engines per week, K is the number of assembly machines, and L is the number of labor teams. Each assembly machine rents for r = $20,000 per week and each team costs w = $2,000 per week. Engine costs are given by the cost of labor teams and machines, plus $2,000 per engine for raw materials. Your plant has a fixed installation of 5 assembly machines as part of its design.

a. What is the cost function for your plant — namely, how much would it cost to produce q engines? What are average and marginal costs for producing q engines? How do average costs vary with output?

b. How many teams are required to produce 250 engines? What is the average cost per engine?

c. You are asked to make recommendations for the design of a new production facility. What capital/labor (K/L) ratio should the new plant accommodate if it wants to minimize the total cost of producing any


True or false: A firm should always produce at an output at which long-run average cost is minimized. Explain.


Because industry X is characterized by perfect competition, every firm in the industry is earning zero economic profit. If the product price falls, no firms can survive. Do you agree or disagree? Discuss


Date: 2015-12-24; view: 1341

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