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Costs, Adding Demand Curves and Perfect Competition

In: Business and Management

Submitted By mujahedb
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Professor Scholz Economics 101, Problem Set #7 Costs, Adding Demand Curves and Perfect Competition Please complete work on sheet and SHOW your work! Problem 1

Posted: 10/20/2009 Due: 10/27/2009

The following chart represents the production function and cost curves for a firm. a) Please fill in the open squares given the information provided, and answer the related questions below. Assume that labor is paid a constant wage, i.e. our firm is a pricetaker in the labor market. Hint: use your definitions! MP L 0 --1 1 4 3 9 5 12 3 14 2 15

L 0 1 2 3 4 5 6

K 10 10 10 10 10 10 10


VC 0 4 8 12 16 20 1 24

FC 36 36 36 36 36 36 36

TC 36 40 44 48 52

AVC --4

AFC --36 2 9

ATC MC ----40 4 11 5.33 4.33 4 4 1.33 0.8 1.33 2 4

1.33 1.33 56 1.43

4 3 2.57 2.4



The following formulas can be used to calculate the necessary values for the chart. • • • • • • • MPL (Marginal Product of Labor) = (change in Q)/(change in L) In this case, labor is the only input that varies and we assume a constant wage. VC (Variable Cost) = L*wage FC (Fixed Cost) = TC – VC AVC (Average Variable Cost) = VC/Q AFC (Average Fixed Cost) = FC/Q ATC (Average Total Cost) = TC/Q or AFC + AVC MC (Marginal Cost) = (change in TC)/(change in Q)

b) What is the relationship between ATC and MC, if ATC is decreasing as output increases? Specifically, can we tell if one is higher than the other? Why?
When ATC is decreasing, MC is less than ATC. This is because the cost of producing each additional unit, represented by marginal cost, is less than the average cost of production for all the units already produced, represented by average total cost. So when the cost of producing the next unit is less than the average unit cost, then the average must fall when this next unit is produced. So ATC must decrease when MC is less than ATC.

Problem 2 Suppose the production function is given by Q=3KL, where K denotes...

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