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# Knapp4 - WEEK 4 CH7 Q1 Consider a firm that uses capital...

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WEEK 4 CH7, Q1 – Consider a firm that uses capital and labor as inputs and sells 5,000 units of output per year at the going market price of \$10. Also assume that total labor costs to the firm are \$45,000 annually. Assume further that the total capital stock of the firm is currently worth \$100,000, that the return available to investors with comparable risks is 10 percent annually, and that there is no depreciation. Is this a profitable firm? Explain your answer. The firm’s revenue is \$50000 (5,000 units x \$10 MP). The total cost of production is the \$45,000 cost of labor plus the opportunity cost of capital. The opportunity cost of capital is \$10,000 (100,000 x 10%). Profit equals total revenue minue total cost. Therefore, profit equals \$50,000 - \$45,000 - \$10,000 = \$-5,000. As a result, the firm is not profitable. CH7, Q4 – The following table gives total output or total product as a function of labor units used. Labor Total Output Marginal Product 0 0 1 5 5 2 9 4 3 12 3 4 14 2 5 15 1 a. Define diminishing returns. The law of diminishing returns states that when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines. b. Does the table indicate a situation of diminishing returns? Explain your answer.

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Knapp4 - WEEK 4 CH7 Q1 Consider a firm that uses capital...

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