Leo Spornstarr
Microeconomics
Bridget Hoffmann Thursday
2 March 2011
Problem Set 3
1a. In order for us to find at what level of output he will experience diminishing product of labor,
we first must find MPL at each level, or at least change in MPL.
MC = w/MPL = delta
(TVC/X(a)).
Therefore, all we need to do is cross multiply to get MPL = w/MC =
delta(TVC/X(a)) and compute.
We get the following table:
x
A
TVC
MPL
0
0
N/A
1
4
1/4
2
7
1/3
3
12
1/5
4
20
1/8
5
32
1/12
6
48
1/16
As a result of looking at this table we see that he experience diminishing MPL when he goes
from producing two to three.
1b. So we need to find the profit maximizing level.
To find P(x), we know that at X(a) of 6, TR
is equal to 96 so we find that P(x) =16.
Since MR = P(x), because as you sell one more unit you
get an increase in revenue.
Since MC = MR when profit is being maximized, we can use the
above table and the fact that MPL = 1/MPC, we see that at 6 MC = MR and therefore at X(a) = 6
he is maximizing profit.
1c.
According to the facts in part b, Clem will operate his business.
This is because profits(P) =
TRTC = TRTFCTVC.
Well a firm would shut down if TR and TVC are both = 0 because then
P(shut down) = 0 TFC = TFC.
The firm will shut down if its profits are negative.
However, as
soon as TRTFCTVC > TFC, then the firm will operate.
We can simplify this by cancelling out
–TFC from both sides and get that if TR>TVC, then the firm will operate.
In our situation,
TR=96 and TVC=48, 96>48 therefore the firm will operate as it is turning a profit.
2a. Average cost = average variable cost + average fixed cost = .
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 Spring '11
 ZELDER
 Microeconomics, shut down, shortrun supply curve, MPl

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