Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Econ 301 – F06 PROBLEM SET 5 - ANSWERS Wissink 1. Critically evaluate the following statements and explain in what way or ways they are true, false, or uncertain. a. Increasing returns to scale is incompatible with the law of diminishing marginal productivity. False. Increasing returns to scale has to do with proportional changes in all inputs and the effect of that on output. On the other hand, the law of diminishing returns deals with short-run production situations where at least one factor of production is fixed. You could easily have I.R.T.S. and still have the law of diminishing marginal returns. b. If the average product of an input is falling, then the average product must exceed the marginal product at that input level. True, remember that if average product is falling, then marginal product must be BELOW the average product, pulling average product down. c. A production function with increasing returns to scale produces nothing but decreasing cost curves. False. It would produce a declining lratc relationship, but, srtc, srvc, lrtc would all be positively sloped. There are lots of cost curves to consider. Beware of exactly which one. d. Knowing a firm's production function is sufficient information for determining the firm's efficient combination of inputs. False. Need to know input prices as well (unless the technology is characterized by perfect complements). e. If marginal cost is greater than average cost, then average cost must be falling. False. If marginal cost is greater than average cost, then marginal cost is pulling average cost up. f. If marginal cost is rising, then average cost must also be rising. False. Marginal cost can easily start to rise BEFORE average cost is rising. As long as marginal cost is still below average cost, average cost would still be falling. 2. Fill in the blanks in the following table that describes the short-run production function of labor in the production of wine, holding capital constant at K=10.
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