ECON 260

Fall 2014
Dr. Talukdar

Homework 3
(due 10/27/14)

(1) Complete the following table:

L

0
1
2
3
4
5
6
7
8

0
15
34
51
65
74
80
83
82

Average Product
of Labor

Name:

(2 points)
Marginal Product
of Labor

When does this firm start experiencing diminishing returns?

(2) Given ATC = $300, TFC = $2000, and TC = $6000, find AVC.
Show all work.

(1 point)

(3) Given TFC = $20, AVC =$10, and ATC = $11, find TVC and Q.

(2 points)

4. If you wish to buy only one CD, use the rule of equal marginal utility per dollar
to determine which one to purchase: Green Days latest CD for $15 which gives
you 75 units of utility, or the Carpenters Old Hits for $2 that gives you 20 units
of utility? Explain your decision.
(1 point)

5a. Draw a budget constraint for Julia, who has a monthly income of $100. Assume
that she buys steak and potatoes, and that steak costs $10 per pound and that potatoes cost
$2 per pound. Add an indifference curve for Julia that is tangent to her budget constraint
at the combination of 5 pounds of steak and 25 pounds of potatoes.
(2 points)

5b. On the same graph, draw a new budget line for Julia, if the price of steaks falls to
$5 a pound. Would she buy the same bundle of steaks and potatoes that she did
before? Explain.
(2 points)