# C when the firm produces q7 the average variable cost

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c. “When the firm produces Q=7, the average variable cost reaches its minimum value and is equal to the marginal cost”. True or False? Briefly explain.
d. Given your answer to part c), will average variable cost be lower or higher than marginal cost when Q=2? Briefly explain.
3. Assume that a firm is currently using a cost-minimizing input combination to produce Q=100. Suppose now that the wage rate rises while the per-unit cost of capital remains unchanged. Will the new long-run cost minimizing input combination be more or less capital intensive if the targeted output level remains Q=100? ( Hint: capital intensity is measured by the ratio K/L). Will the firm’ s long-run total cost be lower or higher than before the increase in the wage rate? Explain your answers with the use of a graph.
Part C. Computational questions (23 points each; 46 points total). Answer TWO of the following THREE questions. To get credit for your answers, show your calculations and explain the main steps. 1. Halloween is over and the consulting firm Treat&Cheat. wants to perform a market analysis of the market for pumpkins. From previous estimates, they know the supply function, which is equal to Q S = −15 + 3࠵? . They don’t know the exact expression of the demand function, but they have reason to believe it is also linear. Furthermore, they know that the current market price and output are P*=15 per pound and Q*=30 (output is measured in thousands of pounds). They also know that the elasticity of demand is, in absolute value, ࠵? ( = 2.5 a. Starting from market data, estimate the demand function (Hint: assume that the market data on price and output represent equilibrium values, and that elasticity in measured in such equilibrium). (5 points) .
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