Question 2 a) Briefly explain why the short run average variable cost of production is U-shaped. b) State the main difference between diminishing returns to a variable factor and decreasing returns to scale in production. c) Consider the production function, q = 30K04104, where q is output, K is capital, and Lis labour units. i) What is the returns to scale property of the above production function? ii) Assuming the cost of production is given as C= vK+wL, where v and w are unit prices of capital and labour respectively, find the optimal level of and L that should be employed. 00 €

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