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Unformatted text preview: Economics 1 Analysis, Problems, and Polices Name:__________________________________ Problem Set 4 (Due in class on November 5 th , 2007) I. Multiple Choice Questions 1. (1.) c) WHY? We know that P=$2 and MC=$1, so P>MC. That means we are adding more to revenue than we are to costs when we make another unit, so we should increase production. We can also use the information about costs to calculate that AVC=$1 and ATC=$2, meaning we are currently at minimum AVC. A diagram can help convince you that increasing Q to where P=MC will imply making positive profits and staying in business. 2. (1.) c) WHY? By definition, ATC=AVC+AFC and AFC=TFC/Q. We know that ATC=2.50 and AVC=2.00, so that AFC=.50. We also know that TFC=500, so .5=500/Q and Q=500/.5=1000. 3. d) WHY? MC and MP of labor are inversely related. In fact, MC = P L /MP. The relationship between marginal and average has to do with the position of marginal relative to average, not with whether marginal is rising or not. If marginal is above average, average is rising....
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This note was uploaded on 05/29/2008 for the course ECON 1 taught by Professor Chang during the Fall '07 term at Dartmouth.
- Fall '07