solutions4[1]

solutions4[1] - EC201, Fall 2007, Prof. Jordi Jaumandreu...

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EC201, Fall 2007, Prof. Jordi Jaumandreu Solutions to Problem set #4 Costs 1. Call H the number of hours, then the expression for cost is C = wH =8 H. The implicit production function is q =4 H , where q is the number of o ces. This implies H = q 4 , expression that substituted for H in the expression of cost gives the cost function C =2 q. This (linear) cost function implies the same constant average and marginal cost: MC = AC . If a franchise lump-sum tax of 30 is imposed we have a new cost function C =30+2 q, which gives an average cost AC = C q = 30 q + q while = C q 2. This is a case of increasing returns to scale by purely technological reasons. A crate of 1 cubic-foot needs 6 sides of a square-foot and this implies a total cost of $6. A 8 cubic-foot needs 6 sides of 2 square-foot, each side of 2 square-foot needs 4 square-foot and this implies a total cost of $24. In general, calling V to the volume, we have C =6( 3 V ) 2 =6 V 2 3 .AC (1) = C ( 1 ) 1 ,AC (8) = C (8) 8 = 24 8 =3 and, in general, AC ( V )= C ( V ) V V 1 3 .
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This note was uploaded on 07/16/2009 for the course EC 201 taught by Professor Idson during the Fall '08 term at BU.

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solutions4[1] - EC201, Fall 2007, Prof. Jordi Jaumandreu...

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