Microeconomics: Principles & Policy
14th Edition
ISBN: 9781337794992
Author: William J. Baumol, Alan S. Blinder, John L. Solow
Publisher: Cengage Learning
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When a firm is using a technically efficient input combination, the firm is also producing in an economically efficient manner. What is your take on this statement?
Let us consider the cost implications of the short-run production schedule from assignment number 7, where capital was fixed at 2 units of capital.
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In this scenario, since we only have two inputs (Capital and Labor), and since the amount of capital is fixed, the cost of total cost capital would also be Total Fixed Cost (TFC) and since labor is variable, the total cost of labor would be Total Variable Cost (TVC). In that context, assume that the cost of capital is $40 per unit per period, while the cost of labor (or wage rate) is also $30 per unit of labor per period.
(a) Use this information set up a diagram (using excel) that shows total cost (TC) and total variable cost (TVC) of the firm per period in the short run with the level of output on the horizontal axi
Let us consider the cost implications of the short-run production schedule from assignment number 7, where capital was fixed at 2 units of capital.
Labor:
0
1
2
3
4
5
6
7
8
9
Output:
0
6
24
60
120
170
210
240
260
270
In this scenario, since we only have two inputs (Capital and Labor), and since the amount of capital is fixed, the cost of total cost capital would also be Total Fixed Cost (TFC) and since labor is variable, the total cost of labor would be Total Variable Cost (TVC). In that context, assume that the cost of capital is $40 per unit per period, while the cost of labor (or wage rate) is also $30 per unit of labor per period.
Also, use this information to then set up another diagram showing the firm's short run marginal cost (MC), average total cost (ATC), and average variable cost (AVC), with output on the horizontal axis (For the marginal cost, remember that when you graph marginal values you should always put them in…
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- A farmer uses K units of machinery and L hours of labor to produce C tons of corn, with the production function, C = 2 L0.5 K. The farmer currently uses L = 20 and K = 10. Suppose the input price ratio is w/r = 1. What would you tell the farmer to do in order to minimize his cost of production given the current level of output?arrow_forwardHow would you determine that a two-input Cobb-Douglas production function has decreasing returns to scale (DRS), increasing returns to scale (IRS) or constant returns to scale (CRS) depending on whether α1 + α2 is larger than, smaller than, or equal to one?arrow_forwardHow would you determine that a two-input Cobb-Douglas production function has decreasing returns to scale (DRS), increasing returns to scale (IRS) or constant returns to scale (CRS) depending on whether β is larger than, smaller than, or equal to one?arrow_forward
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