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Unformatted text preview: Econ 101 Prof.Schuler Spring 2008 Problem Set 4 Due in Lecture on Monday, March 31,2008 Q.1 a. On the diagram drawn for a firm in a highly competitive industry below , carefully sketch and label an average variable cost curve (AVC) and an average total cost curve (ATC). b. Suppose that the price of labor goes up sharply because of shortages, what, if anything, will happen to the marginal cost curve below as a result of this wage increase. c. How will this wage increase affect the AVC, AFC and ATC curves? In other words, for each curve, state whether the wage change will cause the curve to shift up, shift down or not move, and explain why. d. Suppose that a technological innovation causes labor to become more productive so that the firm can produce more output with any given number of workers. Will this affect the MC curve? Explain which direction it will move and why. Q.2 2.Consider the production of donuts in the short run at Krispy Kreme. In what follows, assume that capital is fixed in the short-run and that labor is variable. Also, assume that the production of donuts is such that the marginal productivity of labor increases initially, but then eventually decreases. a. Draw Krispy Kreme’s average total cost curve, average variable cost curve, average fixed cost curve and marginal cost curve. Be sure to carefully label all four curves as well as the x-axis and y-axis. b. On the diagram you made for part a., label the break-even price and the shutdown point. c. Suppose the price of donuts is above the minimum of the average total cost curve, on the diagram above, illustrate Krispy Kreme’s profit maximizing level of output and their profits (or losses). and their profits (or losses)....
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- Fall '08