Homework 2 ECO3101 Fall 2022

1. Consider the graph below which illustrates a given firm’s AP and MP curves:

  • a. At what level of output is AVC minimized? Explain your answer.
  • b. When 15 workers are hired, what is the firm’s AVC if w = 300?
  • c. When 15 workers are hired, what is the firm’s SMC if w = 300?
  • d. When 40 workers are hired, is AVC increasing or decresing? Explain your answer.AP, MP

L

30

AP

MP

0

60

4010

Average and marginal product of labor

Labor

20 50

80

20

40

 

 

2. Suppose the firm’s production function is Q = 2KL where Q is units of output, K is units of capital and L is units of labor. Let K be fixed at 2 units, i.e., 𝐾̅ = 2.

  • a. What is the firm’s short-run production function?
  • b. Derive and graph the firm’s Average Product curve and the Marginal Product curve. Put AP and MP in the same graph.
  • c. What is different about these AP and MP curves? Do they look like regular AP and MP curves?
  • d. Does the firm experience diminishing marginal returns? Why or why not. Explain.

3. Florida Fabrication and Design produces industrial supplies. After two quarters of increasing levels of production, the CEO was upset to learn that, during this time of expansion, the marginal productivity of the newly hired workers declined. Believing that the new works were either lazy or ineffectively supervised (or possibly both!), the CEO instructed the factory foreman to “crack down” on the new workers to bring their productivity levels up.

Explain carefully in terms of production economics why it might be that no amount of “cracking down” can increase marginal worker productivity