The short-run production situation for a firm is listed on this table. What is the Marginal Product of Labor at 2 units of labor? Units of Capital, Units of Labor, K L Output, Q Marginal Product of Average Product of Labor Labor 3 0 0.0 1 50.0 2 3 100.0 4 10 - 40

How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect me lung-nm average cost curve of a firm? Can you draw the old curve and the new one on the same axes? How might such an improvement affect other firms in the industry?

How does fixed cost affect marginal cost? Why is this relationship important?

What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?

What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do you suppose that is? Is this relationship the same in the long run as in the short run?

Are fixed costs also sunk costs? Explain.

What is a production function?

Based on your answers to the WipeOut Ski Company in Exercise 7.3, now imagine a situation where the firm produces a quantity of 5 units that it sells for a price of 25 each. What will be the companys profits or losses? How can you tell at a glance whether the company is making or losing money at this price by looking at average cost? At the given quantity and price, is the marginal unit produced adding to profits?

In choosing a production technology, how will firms react if one input becomes relatively more expensive?

Average cost curves (except for avenge fixed cost) tend to be U-shaped, decreasing and then increasing. Marginal cost curves have the same shape, though this may be harder to see since most of the marginal cost curve is increasing. Why do you think that average and marginal cost curves have the same general shape?