Assignment #5: Please write your names.

Failure to write your names will cost you 5 points per

member. Submit your assignment (*.docx or *.pdf) in the discussion board no later than
Wednesday, May 3, 2023.
1. A firm can manufacture a product according to the production function:

Q=F ( K , L )=K 3/ 4 L1/ 4

a. Calculate the average product of labor, AP L, when the level of capital is fixed at 81
units and the firm uses 16 units of labor. How does the average product of labor
change when the firm uses 256 units of labor?
Q=F ( 81,16 )=813/ 4 161/ 4
K a Lb
AP L =
L
3/ 4 1 /4
(81) (16) 27
AP L = = ∨3.38
16 8

Q=F ( 81,256 )=813 / 4 2561/ 4

3/ 4 1 /4
(81) (256) 27
AP L = = ∨0.42
256 64

b. Find an expression for the marginal product of labor, MP L, when the amount of
capital is fixed at 81 units. Then, illustrate that the marginal product of labor
depends on the amount of labor hired by calculating the marginal product of labor
for 16 and 81 units of labor.
a b−1
MP L =b K L
MP L =1/4 ¿
MP L =0.84

a b−1
MP L =b K L
MP L =1/4 ¿
MP L =0.25

c. Suppose capital is fixed at 81 units. If the firm can sell its output at a price of $200
per unit of output and can hire labor at $50 per unit of labor, how many units of
labor should the firm hire in order to maximize profits?
(Please show complete solution.)
K=81 P=200 w=50
MP L =1/4 ¿
−3
MP L =6.75 L 4

P × MP L =w
 −3
4
200 ×6.75 L =50
3
4
6.75/ L =50/ 200
3
1
6.75 L 4 =
4
3
4
L =27

4
3 4
(L ¿ ¿ ) =27 3 ¿
4 3
L=81
2. A firm’s product sells for $4 per unit in a highly competitive market. The firm produces
output using capital (which it rents at $25 per hour) and labor (which is paid a wage of $30 per
hour under a contract for 20 hours of labor services). Complete the following table and draw a
graph to illustrate your answers to questions f, g and h with (1) on the horizontal axis and (4)
on the vertical axis. For d and e, show your worksheet.
a. Identify the fixed and variable inputs.
Labor: Fixed
Capital: Variable
b. What are the firm’s fixed costs?
AFC=FC × w
AFC=20 ×30=600
c. What is the variable cost of producing 475 units of output?
VC =Cost ×Unit of Capital
VC =6 ×25=475
VC =150

VC =Cost ×Unit of Capital

VC=7 ×25=475
VC=175
d. How many units of the variable input should be used to maximize profits?
Seven units (7) of input can be used to maximize profits.
 e. What are the maximum profits this firm can earn?
Profits=( P∗Max Output )−( FC +TC )
Profit=( 4 ) ( 475 ) −( 600+175 )=1,125
f. Over what range of variable input usage do increase returns to scale exist?
At the range 2 to 4 units increase in return exist.
g. Over what range of variable input usage do decrease returns to scale exist?
More than 4 units a decrease in return exist.
h. Over what range of variable input usage do negative marginal returns exist?
More than 8 units negative returns exist.

3. An economist estimated that the cost function of a single product firm is:
C(Q) = 100 + 20Q + 15Q2 + 10Q3
Based on the information, determine:
a. The fixed cost of producing 10 units of output.
FC = 100
b. The variable cost of producing 10 units of output.
2 3
VC =20 ( 10 )+ 15 (10 ) +10 ( 10 )
VC=200+1500+10000
VC=11,700
c. The total cost of producing 10 units of output.
TC =VC + FC
TC=11,700+100
TC =11,800
d. The average fixed cost of producing 10 units of output.
FC =100÷ 10
FC =10
e. The average variable cost of producing 10 units of output.
AVC=11,700 ÷ 10
AVC=1,170
 f. The average total cost of producing 10 units of output.
ATC=11,800÷ 10
ATC=1,180
g. The marginal cost when Q = 10.
C (Q)=100+20 Q+15Q 2+10 Q3
M (10)=20 Q+30 Q+30 Q
MC=20 (10)+30 (10)+30 ¿
MC=3,500

4. A manager hires labor and rents capital in a very competitive market. Currently, the wage
rate is $12 per hour and capital is rented at $8 per hour. If the marginal product of labor is 60
units per hour and the marginal product of capital is 60 units per hour, is the firm using the
cost-minimizing combination of labor and capital? If not, should the firm increase or decrease
the amount of capital used in its production process? (Please show complete solution.)
Given:
w=12 , r=8 ; MP L =60 , MP K =60

Cost-Minimizing Input Rule:

MP L MP K
=
w r
60
MP L = =5
12
60
MP K = =7.5
8
5<7.5
The firm is not implementing cost minimization for labor and capital because the marginal
product of capital exceeded the marginal product of labor. Therefore, the firm should increase
the amount of capital.
5. A firm’s fixed cost for 0 units of output and its average total cost of producing different
output levels are summarized in the following table. Complete the table to find the fixed cost,
variable cost, total cost, average fixed cost, average variable cost and marginal cost at all
relevant levels of output. Graph the following information with (1) on the horizontal axis and
(2), (3) and (4) on the vertical axis. For the second graph, plot (5), (6), (7) and (8) against (1) on
the horizontal axis.