A firm faces a production function given by q = √kl where q is the output, k is the firm's amount of capital equipment and I is the amount of labour-time employed. (a) In the short run, the amount of capital equipment is fixed at k 100. The rental rate for k is v= $1, and the wage rate for l is w = $2. Calculate the firm's short-run average cost (SAC) and short-run marginal cost (SMC) functions. Graph the SAC and the SMC curves for the firm. (b) (c) Where does the SMC curve intersect the SAC curve? Explain why the SMC curve will always intersect the SAC curve at its lowest point. Calculate the long-run total cost of production. For w= $2, v = = $1, graph the long-run total cost curve. Show that this is an envelope for the short-run curves computed in part (a).

A firm faces a production function given by q = √kl where q is the output, k is the firm's amount of capital equipment and I is the amount of labour-time employed. (a) In the short run, the amount of capital equipment is fixed at k 100. The rental rate for k is v= $1, and the wage rate for l is w = $2. Calculate the firm's short-run average cost (SAC) and short-run marginal cost (SMC) functions. Graph the SAC and the SMC curves for the firm. (b) (c) Where does the SMC curve intersect the SAC curve? Explain why the SMC curve will always intersect the SAC curve at its lowest point. Calculate the long-run total cost of production. For w= $2, v = = $1, graph the long-run total cost curve. Show that this is an envelope for the short-run curves computed in part (a).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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