Chapter 8 HW-MGNT6005 - Chapter 8 P 8.1 Marginal Rate of...

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Chapter 8 P 8.1 Marginal Rate of technical Substitution The following production table provides estimates of the maximum amounts of output possible with different combinations of two input factors, X, and Y. (Assume that these are just illustrative points on a spectrum of continuous input combinations.) Units of Y Used Estimated Output per Day 5 210 305 360 421 470 4 188 272 324 376 421 3 162 234 282 324 360 2 130 188 234 272 305 1 94 130 162 188 210 1 2 3 4 5 Units of X Used A. Do the two inputs exhibit the characteristics of constant, increasing, or decreasing marginal rates of technical substitution? How do you know? B. Assuming that output sells for $3 per unit, complete the following tables: X Fixed at 2 Units Units of Y Used Total Product of Y Marginal Product of Y Average Product of Y Marginal Revenue Product of Y 1 130 +130 130 390 2 188 +58 94 174 3 234 +46 78 138 4 272 +38 68 114 5 305 +33 61 99 Y Fixed at 2 Units Units of X Used Total Product of X Marginal Product of X Average Product of X Marginal Revenue Product of X 1 130 +130 130 390 2 188 +58 94 174 3 234 +46 78 138 4 272 +38 68 114 5 305 +33 61 99 C. Assume that the quantity of X is fixed at 2 units. If output sells for $3 and the cost of Y is $120 per day, how many units of Y will be employed? The firm will employ three units of Y because the value gained by adding the first three units exceeds marginal cost. When three units of Y are employed, the third unit causes total revenues to rise by $138 while costing only $120. At the margin, employing the third unit of Y increases total profit by 18 (= $138-120). A fourth unit
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This note was uploaded on 11/13/2011 for the course MIS 4100 taught by Professor Maxnorth during the Spring '11 term at Birmingham-Southern College.

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Chapter 8 HW-MGNT6005 - Chapter 8 P 8.1 Marginal Rate of...

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