ECON102 HW3

Plot the output against the TVC (total variable cost). Put the output on the horizontal axis and the TVC on the vertical axis. What is the general shape of this function?

It is an upward sloping function

Think about the general relationship between the marginal product of labor (MPL) and the marginal cost of output (MC). As MPL increases, what happens to MC?

MC decreases

In the table you just filled out, find where diminishing marginal productivity begins. Specifically, which is the first worker to add less marginal output than the previous worker?

fourth worker

LeatherTown sells wallets for a price of $50 each. The firm pays its workers $100 per day. How many workers should LeatherTown hire?

not enough information to answer this question

Diminishing marginal returns to labor

none of the above

What is an intuitive explanation for increasing returns to scale (also called economies of scale)?

Bigger firms with larger amounts of capital can produce the goods at a lower cost

Billy is an employee at BigCo. Suppose that at a wage rate of w = $10 per hour, Billy worked 40 hours per week. After Billy gets a raise to a new wage of w = $12, he decides to work 45 hours per week. What can we infer about Billy from this information?

Billy's substitution effect is greater than the income effect

Plot the output against the AFC (average fixed cost). Put the output on the horizontal axis and the AFC on the vertical axis. What is the general shape of this function?

It is a downward sloping function

Plot the labor input (workers) against the MP (marginal product). Put the labor input on the horizontal axis and the MP on the vertical axis. What is the general shape of this function?

It is a hill-shaped function (goes up, peaks, then falls)

Plot the output against the TFC (total fixed cost). Put the output on the horizontal axis and the TFC on the vertical axis. What is the general shape of this function?

It is a horizontal line

Plot the output against the TC (total cost). Put the output on the horizontal axis and the TC on the vertical axis. What is the general shape of this function?

It is an upward sloping function

Think about the general relationship between the marginal product of labor (MPL) and the marginal cost of output (MC). As MPL decreases, what happens to MC?

MC increases

The Marginal Revenue Product of Labor (MRPL) curve is equivalent to:

The labor demand curve

Suppose that capital and labor are complements in production. Assume there is a decrease in the quantity of capital. How will this affect the demand curve for labor?

The labor demand will shift to the left

Suppose that capital and labor are complements in production. Assume there is an increase in the quantity of capital. How will this affect the demand curve for labor?

The labor demand will shift to the right

Suppose that capital and labor are substitutes in production. In other words, the firm can generally use capital or labor to get the production completed. Suppose the cost of capital increases greatly. How will this affect the demand for labor?

The labor demand will shift to the right

Suppose there is an increased demand for output. How will this affect the demand curve for labor?

The labor demand will shift to the right

For the following 6 questions, refer to the table you filled out above. Plot the labor input (workers) against the output. Put the labor input on the horizontal axis and the output on the vertical axis. What is the general shape of this function?

an upward sloping function that gets shallower as a lot of workers are hired

What is considered to be a cause of decreasing returns to scale (also called diseconomies of scale)?

bureaucratic inefficiencies

In the long run, what is true about constant returns to scale? Constant returns to scale means that doubling our inputs will result in _________ the output, and the long run average cost curve is ___________.

doubling, horizontal

In the long run, what is true about increasing returns to scale? Increasing returns to scale means that doubling our inputs will result in _________ the output, and the long run average cost curve is ___________.

more than doubling, downward sloping

If the margin is greater than the average, what can we say about the average and margin?

the average is rising

According to the table (and general theory), what is true?

the highest MP is associated with the lowest MC

A profit-maximizing firm will continue to hire labor inputs as long as

the marginal revenue product is greater than the wage rate

What is the general relationship between AVC, ATC, and MC?

the three functions are all valley-shaped, and MC intersects each of the average functions at their minimum