ajaz_eco_204_2012_2013_chapter_13_Short_Run_CMP_PP

Answer with capital fixed and labour variable

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: rns, it means that (holding k constant) doubling L doubles q. Thus and (b) What is the elasticity of output with respect to labor? Does your answer make sense give the company has constant returns? 12 ECO 204 Chapter 13: Practice Problems & Solutions for The Short Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Answer From part (a) . We want the elasticity of q with respect to which is Taking the ln of both sides and differentiating with respect to L yields. Therefore, if L increases by constant returns. percent then q will also increase by percent. This makes sense given that we have (c) Suppose the company doubles labor. Without using the equation for ( ) what is the impact on total variable cost? Average variable cost? Average cost Answer Total Variable Cost (TVC) is () If the company doubles labour, then TVC(q) must also double. We know that () () . As the company doubles inputs (because it has constant returns) it doubles output. Thus, when the company doubles inputs, the ratio () () () remains constant. On the other hand () () () () With constant returns, as labout is doubled AVC(q) remains constant but AFC(q) declines with q. Thus ( ) decines. (d) Suppose the company doubles labor. Using the equation for ( ) what is the impact on total variable cost? Average variable cost? Average cost Answer The cost equation is () With constant returns As L doubles q doubles and TVC(q) doubles, but () ) and () () ( ( ) ( () () ) () () ( ) which is a constant. Therefore, which declines with quantity. 13 ECO 204 Chapter 13: Practice Problems & Solutions for The Short Run Cost Minimization Problem in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (13.8) Ajax Inc. produces cranberry juice and has the short run cost function ( ) . Don Damiano Inc. produces grape juice and has the short run cost function ( ) . If Ajax and Don Daminao merge the short run cost function for both cranberry and grape juice is: ( ) . Are there economies of scope if Ajax and Don Damiano merge? Answer To see if there economies of scope, we simply need to check if cost of cranberry and grape juices is lower than the sum of cranberry plus grape juice. ( ) Whereas ( ) . Observe that ( ) () ( ). This () shows that it is cheaper to produce the juices together than separately. Therefore, there are economies of scope. 14 ECO 204 Chapter 13: Practice Problems & Solutions for The Short Run Cost Minimization Problem in ECO 204 (this version 2012-2013)...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online