Review2answers - Sample Short Answer/Problem Questions...

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Sample Short Answer/Problem Questions: Review Session #2 Question 1: Costs of Production 1a) A fast-food restaurant currently pays $5 per hour for servers and $50 per hour for rental machinery. The restaurant uses seven hours of server time per unit of machinery time. Determine whether the restaurant is minimizing its cost of production when the ratio of the marginal product of capital to the marginal product of labor is 12. If not, what adjustments are called for to improve the efficiency in resource use? In equilibrium, r/w = MP K /MP L . I.e. if the firm is minimizing its costs of production, then the MRTS will equal a ratio of the prices of the inputs. The ratio of prices, r/w = 50/5 = 10, and the MRTS of capital for labor 12 K L MP MP = . Since these two ratios are not equal, the firm should change the mix of inputs. To increase efficiency in the use of inputs, the firm should use more capital and use less labor to make the ratios equal. 1b) Complete the following table. Explain the pattern observed when looking at AC and MC. Q TFC TVC TC MC AFC AVC ATC 0 50 0 50 - - - - 1 50 10 60 10 50 10 60 2 50 25 75 15 25 12.5 37.5 3 50 50 100 25 16.7 16.7 33.4 4 50 100 150 50 12.5 25 37.5 5 50 175 225 75 10 35 45 6 50 300 350 125 8.3 50 58.3 MC is increasing from 1Q, implying diminishing marginal product of labor. AC start high (due to the presence of fixed costs). AC decline initially as FC get spread out over more output, but then start to increase with the increase in AVC. 1c) In the European Union, more than 400 firms produce shoes but only 1 produces aircraft. What might be one of the main explanations for the difference in the number of firms in the
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This note was uploaded on 10/25/2010 for the course MIT 2 taught by Professor Tom during the Spring '10 term at Aarhus Universitet.

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Review2answers - Sample Short Answer/Problem Questions...

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