Answer 1 Answer 2

L K Q Q/L ∆Q / ∆ L
In this case, the firm is
3 8 33 11 n.a
relatively inflexible
4 8 36 9 3
about substituting
5 8 40 8 4
labor for capital (or
6 8 45 7.5 5
vice versa) to
maintain an output
of Q1

0 1

Answer 3 Answer 4

When MP is falling, AP may be rising or falling.
The slope of the AP curve depends not on the
slope of MP curve, but on whether MP curve
lies above or below the AP curve.
The TP of labor curve is the graph of the
production function with only one variable
input. A rational firm would not choose to
employ additional labor if it caused a decline
in total output.

2 3

Answer 5
Since your department was allocated more workers
1) MP = dTP/ dL = 10 – 0.04 L
2) AP = TP/ L = - 50 / L + 10 – 0.02 L
3) AP reaches its maximum when AP = MP:
- 50 / L + 10 – 0.02 L = 10 – 0.04 L, or
– 0.02 L2 = - 50, so L2 = 2500, or L = 50
At L = 50, MP = 10 – 0.04 ( 50 ) = 8
Answer 6
but not more capital, the law of diminishing
marginal returns indicates that the additional
output from these last workers might be lower.
If MP < AP, AP would fall. Thus, the decline is
probably simply due to technical matter, not
management problem. It would be prudent to
consider increasing the capital / labor ratio in the
department in the future

4 5

1
 Answer 7 Answer 8
Yes
His economic cost is: 5 + 1 + 3 ( 15 ) = $ 51
The income forgone by not taking the tutoring
Answer 9
job is ignored because it is not the highest Q FC VC TC AVC ATC MC
valued use of his time. 13 1125 975 2100 75 161.5 n.a
14 1125 1120 2245 80 160.4 145
15 1125 1275 2400 85 160 155
16 1125 1440 2565 90 160.3 165
17 1125 1615 2740 95 161.2 175

6 7

Answer 10 Answer 11

If LMC > LAC and LAC is U-shaped then the firm This LR AC curve is U-shaped, with a minimum at
must currently be to the right of the point of Q = 150. Therefore, there are economies of
minimum LR AC. The firm should reduce scale for Q < 150 and diseconomies of scale
output. for Q > 150

8 9

Answer 12 Answer 13

Increasing returns to scale are evident, since the

slope of the AC curve is negative.
1) $10 ( $6 for the ticket and $4 that you could
have earned in that half-hour).
2) Since you could sell the ticket for $20, the
economic cost of using the ticket is $20.
3) Yes, since the economic cost of obtaining a
ticket worth $20 is only $10.

10 11

2
 Answer 14
Answer 15
To make 15,000 copies per month:
• Small : [ 200 + 0.035 ( 15,000) ] = $725 Q TC VC FC ATC AFC AVC MC
• Large : [ 400 + 0.02 ( 15,000) ] = $700 100 7,000 3,000 4,000 70 40 30
They should rent the large machine. 101 7,400 3,400 4,000 73.27 39.60 33.66 400
The breakeven point: 102 7,900 3,900 4,000 77.45 39.22 38.24 500

200 + 0.035 Q = 400 + 0.02 Q

Q = 13,333.33 : this is the smallest number
of copies that would make it desirable to
rent the large machine.
12 13

Answer 17
Answer 16

1) MC function:
ATC = TC / Q = 300 / Q + 3 + 0.02Q
MC ( Q ) = 30 + 4Q
AVC = VC / Q = [3Q + 0.02Q] / Q = 3 + 0.02Q
2) ATC = 180,000 / Q + 30 + 2Q
MC = ∆TC / ∆Q = 3 + 0.04Q

14 15

Answer 17
Answer 18

a) MP function of K and L:
3) Minimum of ATC curve occurs where:
MPL = dQ / dL = 2K
ATC = MC
MPK = dQ / dK = 2L – 4
180,000 / Q + 30 + 2Q = 30 + 4Q, or
MRTS = MPL/ MPK = K / (L – 2)
Q2 = 90,000
b) TC is given, to find out Qmax , 2 conditions
Q = 300
must be satisfied:
At Q = 300, MC = 30 + 4 ( 300 ) = 1,230. So
MPK / PK = MPL/ PL (1)
minimum ATC is 1,230
K. PK + L. PL = TC (2)
16 17

3
 Answer 18 Answer 18

Substitute into (1) and (2): Substitute (2’) into (1’):

(1) ⇨ (2L – 4) / 600 = 2K / 300 2 (50 – 2K) – 4 = 4K
⇨ 2 L – 4 = 4K (1’) 8K = 96
(2) ⇨ 600K + 300 L = 15000 ⇨ K = 12 và L = 26
⇨ L= 50 – 2K (2’) The optimal point: K = 12 and L = 26
Qmax: Q = 2 x 12 (26 – 2) = 576

18 19

Answer 18 Answer 19
c) To produce Q = 900:
F (λ L, λ K) > λ F (L, K): Increasing returns to scale
2K (L – 2) = 900
F (λ L, λ K) = λ F (L, K): Constant returns to scale
from (1’): 2L – 4 = 4K
F (λ L, λ K) < λ F (L, K): Decreasing returns to scale
⇨ L = 2K + 2 (1’’)
Substitute (1’’) into production function:
2K (2K + 2 – 2)= 900
⇨ K = 15 and L = 32
TCmin is:
TC = 15 x 600 + 32 x 300 = 18600 20 21

Answer 19 Answer 19

a) F (K, L) = K2L c) F (K, L) = (KL)0,5

F (λ L, λ K) = (λ K)2. λ L = λ3 F (K, L) > λ F (K, F (λ L, λ K) = (λK λL)0,5 = λ (KL)0,5 = λ (K, L)
L) Constant returns to scale
Increasing returns to scale
b) F (K, L) = 10K + 5L
F (λ L, λ K) = 10 (λ K) + 5(λ L)
= λ (10K + 5L) = λ F (K, L)
Constant returns to scale
22 23