Given that wage is $10. The last worker hired by Cal's Corn Farm added 20 ears...

Given that wage is $10. The last worker hired by Cal's Corn Farm added 20 ears of corn. The price of 4 ears of corn is $1. Should Cal hire the last worker?

Explain why the long-run average cost is typically U-shaped. Explain the connection between the shape of long run average cost curve and returns to scale.

Solutions

Expert Solution

Ans. The price of 4 ears of corn = $1

=> Price of 20 ears of corn = 1*5 = $5

But wage for the last worker hired is $10, so, output produced by him has $5 value. Thus, marginal cost of hiring is more than the marginal revenue earned by him. Therefore, the last worker shouldn't be hired.

Ans. The long run average cost curve is a U-shaped curve because of the returns to scale. So, according to returns to scale, initially increasing the production will lead to a decrease in average cost making it to slope downwards, this phase is called economies of scale. As production is increased, the average cost reaches its minimum, this is called constant returns to scale and as production is increased further, the average cost starts to increase making average cost curve to slope upwards. This phase is called decreasing returns to scale. Thus, these three phases make the long run average cost curve a U-shaped curve.

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Rahul Sunny answered 3 months ago

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