Price Theory HW5 answers

Price Theory HW5 answers - Skelton Eco 3301 Homework 5...

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Skelton Eco 3301 Homework 5 Answers 1. A) Since capital is fixed at 10, then the short-run production function would be Q = 40L. This implies that for any level of output (Q), the number of labor teams hired will be L = Q/40. The total cost function is thus given by the sum of the costs of capital labor and raw materials: TC = rK + wL + 2,000Q = 12,000*10 + 3,000*(Q/40) + 2,000Q = 120,000 + 2,075Q Therefore, the average cost function is then given by: AC = TC/Q = 120,000/Q + 2,075 And, since the total cost function is linear and each unit has a marginal cost of $2,075, then marginal cost is fixed at $2,075 (because each unit costs us an additional $2,075). Lastly, in looking at the average cost function, we can see that average costs will decline as output increases and that average costs will increase as output decreases. B) To produce 80 units, labor must be 2 (because L = Q/40 from part A). C) Now, we move into the long-run and capital will no longer be fixed at 10. So, we need to find the cost minimizing combination of K and L for any level of output Q.
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This note was uploaded on 10/02/2008 for the course ECON 3301 taught by Professor Skelton during the Spring '08 term at SMU.

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Price Theory HW5 answers - Skelton Eco 3301 Homework 5...

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