# Homework 4 Answer Key - Econ 101 Homework 4 Fall 2007 Due...

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Econ 101 Homework 4 Fall 2007 Due 11/12/2007 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name , TA name and section number on top of the homework (legibly). Make sure you write your name as it appears on your ID so that you can receive the correct grade. Please remember the section number for the section you are registered, because you will need that number when you submit exams and homework. Late homework will not be accepted so make plans ahead of time. Good luck! 1. Production and Costs Complete the following table. The total fixed cost is \$450. The firm is a price-taker in the labor market, so the wage rate is constant. Quantity Labor FC VC TC AFC AVC ATC MC MPL 0 0 450 0 450 -- -- -- -- -- 5 1 450 90 540 90 18 108 18 5 20 2 450 180 630 22.5 9 31.5 6 15 45 3 450 270 720 10 6 16 3.6 25 60 4 450 360 810 7.5 6 13.5 6 15 70 5 450 450 900 6.4 6.4 13 9 10 75 6 450 540 990 6 7.2 13.2 18 5 Use the information you calculated in the table above to answer the following questions. a. At what level of output and labor usage does marginal cost attain its minimum? Marginal cost attains its minimum at Q=45, and L=3 b. At what level of output and labor usage is ATC at its minimum? ATC is at its minimum at Q=70, L=5 c. At what level of labor usage does the law of diminishing returns first occur? The law of diminishing returns first occurs with the hiring of the fourth unit of labor since this is the level of labor usage when the MP of labor first increases but at a diminishing rate.

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d. When output is equal to zero units, why does the firm still incur costs in the short run? Explain your answer. In the short run, the firm still incurs costs even though its production is equal to zero units because it still has fixed costs. It cannot get rid of its capital instantaneously so it will continue to have these costs even though it is not producing any output. e. As output increases, why does AVC first decrease, but then eventually increase? Explain your answer. AVC eventually increases due to diminishing returns to labor: as additional units of labor are hired the amount of capital per unit of labor decreases until eventually the additional units of labor are less productive and hence, this leads to rising average variable costs of production. f.
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## This note was uploaded on 03/30/2008 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at University of Wisconsin.

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Homework 4 Answer Key - Econ 101 Homework 4 Fall 2007 Due...

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