Econ1-Fall2010-PS6-sols

Econ1-Fall2010-PS6-sols - Econ 1 PS #6 Solutions Fall 2010...

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Econ 1 PS #6 Solutions Fall 2010 1. Many small boats are made of fiberglass, which is made from crude oil. a. Assuming that the amount of fiberglass that a firm uses can be varied in the short run and that other factors of production are fixed, draw a standard set of cost curves for a firm in the boat industry. Clearly label the average total cost curve, the average variable cost curve, the average fixed cost curve and the marginal cost curve. These are the solid curves below with the 0 subscripts. b. Now suppose that the price of crude oil rises, on your diagram show what happens to the cost curves of an individual boat-making firm in the short run. These are indicated with the dashed curves above with the 1 subscripts. Q P MC 0 AFC ATC 0 ATC 1 MC 1 AVC 0 AVC 1
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2. Consider the following cost curves for a given firm. a. On the above diagram, carefully sketch and label an average variable cost curve (AVC) and an average total cost curve (ATC). b. Suppose that the price of labor goes up, on the above picture sketch what, if anything, will happen to the marginal cost curve as a result of this wage increase. c. How will this wage increase affect the AVC, AFC and ATC curves? In other words, for each curve, state whether the wage change will cause the curve to shift up, shift down or not move. AVC shifts up, AFC does not move, ATC shifts up. d. Suppose that a technological innovation causes labor to become more productive so that the firm can produce more output with any given number of workers. Will this affect the MC curve? Explain. The marginal cost of labor will shift down. As labor becomes more
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Econ1-Fall2010-PS6-sols - Econ 1 PS #6 Solutions Fall 2010...

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