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Answers to Study Questions Set 6

Answers to Study Questions Set 6 - Answers to Study...

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Answers to Study Questions Set 6 Page 169 Question 6 ( Key Question ) Complete the following table by calculating marginal product and average product from the data given. Plot total, marginal, and average product and explain in detail the relationship between each pair of curves. Explain why marginal product first rises, then declines, and ultimately becomes negative. What bearing does the law of diminishing returns have on short-run costs? Be specific. “When marginal product is rising, marginal cost is falling. And when marginal product is diminishing, marginal cost is rising.” Illustrate and explain graphically. Inputs of labour Total product Marginal product Average product 0 1 2 3 4 5 6 7 8 0 15 34 51 65 74 80 83 82 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ Marginal product data, top to bottom: 15; 19; 17; 14; 9; 6; 3; -1. Average product data, top to bottom: 15; 17; 17; 16.25; 14.8; 13.33; 11.86; 10.25. Your diagram should have the same general characteristics as text Figure 6-2. MP is the slope—the rate of change—of the TP curve. When TP is rising at an increasing rate, MP is positive and rising. When TP is rising at a diminishing rate, MP is positive but falling. When TP is falling, MP is negative and falling. AP rises when MP is above it; AP falls when MP is below it. MP first rises because the fixed capital gets used more productively as added workers are employed. Each added worker contributes more to output than the previous worker because the firm is better able to use its fixed plant and equipment. As still more labour is added, the law of diminishing returns takes hold. Labour becomes so abundant relative to the fixed capital that congestion occurs and marginal product falls. At the extreme, the addition of labour so overcrowds the plant that the marginal product of still more labour is negative—total output falls. Illustrated by Figure 6-6. Because labour is the only variable input and its price (its wage rate) is constant, MC is found by dividing the wage rate by MP. When MP is rising, MC is falling; when MP reaches its maximum, MC is at its minimum; when MP is falling, MC is rising. Page 169 Question 7 Why can the distinction between fixed and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance premiums, wage payments, depreciation and obsolescence charges, sales taxes, and
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rental payments on leased office machinery. “There are no fixed costs in the long run; all costs are variable.” Explain. The distinction can be made because there are some costs that do not vary with total output. These are the fixed costs that, fundamentally, are related to the scale or size of the plant. In the short run, by definition, the scale of the plant cannot change: The firm cannot bring in more machinery or move to a larger building. All costs that are related to the scale of the plant—costs that continue to be incurred even though the firm’s output may be zero—are fixed costs. On the
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