# Mc stands for marginal cost for this problem assume

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MC stands for marginal cost. For this problem assume that the price of labor and the price of capital is constant. L K Q MPL VC FC TC AVC AFC ATC MC 0 5 0 ----- ---- ----- ----- ----- 1 5 2 2 5 6 \$1.25/unit of output 3 5 6 4 5 7 5 5 25 6 5 30 \$30 7 5 4 8 5 3 9 5 2 10 5 40 a. Fill in the missing cells in the above table. b. What is the price of labor? c. What is the price of capital? d. At what level of labor usage does diminishing marginal returns to labor first occur? e. At what level of output is marginal cost equal to average variable cost? f. At what level of output is marginal cost equal to average total cost? If price is equal to MC is equal to ATC, then what are the firm’s profits? Verify that your answer is correct? g. If the product sells for \$5 per unit in a perfectly competitive industry, how many units should this firm produce? What will the firm’s profits be in the short run? 4. 4
a. L K Q MPL VC FC TC AVC AFC ATC MC 0 5 0 ----- \$0 \$7.50 \$7.50 ---- ----- ----- ----- 1 5 2 2 \$5 \$7.50 \$12.50 \$2.50/unit of output \$3.75/unit of output \$6.25/unit of output \$2.50/unit of output 2 5 6 4 \$10 \$7.50 \$17.50 \$1.67/unit of output \$1.25/unit of output \$2.92/unit of output \$1.25/unit of output 3 5 12 6 \$15 \$7.50 \$22.50 \$1.25/unit of output \$.63/unit of output \$1.88/unit of output \$.83/unit of output 4 5 19 7 \$20 \$7.50 \$27.50 \$1.05/unit of output \$.39/unit of output \$1.44/unit of output \$.71/unit of output 5 5 25 6 \$25 \$7.50 \$32.50 \$100/unit of output \$.30/unit of output \$1.30/unit of output \$.83/unit of output 6 5 30 5 \$30 \$7.50 \$37.50 \$1.00/unit of output \$.25/unit of output \$1.25/unit of output \$1.00/unit of output 7 5 34 4 \$35 \$7.50 \$42.50 \$1.03/unit of output \$.22/unit of output \$1.25/unit of output \$1.25/unit of output 8 5 37 3 \$40 \$7.50 \$47.50 \$1.08/unit of output \$.20/unit of output \$1.28/unit of output \$1.67/unit of output 9 5 39 2 \$45 \$7.50 \$52.50 \$1.15/unit of output \$.19/unit of output \$1.34/unit of output \$2.50/unit of output 10 5 40 1 \$50 \$7.50 \$57.50 \$1.25/unit of output \$.19/unit of output \$1.44/unit of output \$5.00/unit of output b. Price of labor is \$5 per unit of labor. c. Price of capital is \$1.50 per unit of capital. d. Diminishing marginal returns to labor begins upon hiring the fifth unit of labor since output increases with hiring this unit of labor, but output increases at a diminishing rate. e. When MC = AVC = \$1.00/unit of output, then Q = 30 units of output. f. When MC = ATC = \$1.25/unit of output, then Q = 34 units of output. If P = MC = ATC then profits should be equal to zero. To verify, calculate total revenue: TR = P*Q = (\$1.25/unit of output)(34 units of output) = \$42.50. From the table find the TC of producing 34 units of output: TC = \$42.50. The firm is making zero economic profit. g. When price of the good is \$5, then the firm wants to equate price to its MC. So P = MC = \$5 and the firm will therefore decide to produce 40 units of output. Total revenue from producing 40 units of output is equal to TR = (\$5 per unit of output)(40 units of output) = \$200. TC can be found in the table: TC of producing 40 units of output = \$57.50. Profit when producing 40 units of output is therefore equal to \$200 minus \$57.50, or profit is equal to \$142.50.
5. Suppose a perfectly competitive firm has a total cost function that is equal to TC = q 2 + 100q + 100.