Question

MicroEcon chapter 7&8
#4-9

PLEASE EXPLAIN WHY ANSWER IS CORRECT

Use the table below to answer questions 4 to 6

Units of Capital	Units of Labor	Output
2	0	0
2	1	20
2	2	50
2	3	75
2	4	80

4. The marginal product of the second unit of the variable input (labor) is

(a)        20                                            (c)        30

(b)        25                                            (d)       50

5.   Diminishing marginal productivity occurs with which unit of labor?

(a)        first                                          (c)        third

(b)       second                                     (d)       fourth

6.   Short run marginal costs rise because of

(a)        rising prices of variable inputs                     

(b)        declining productivity of fixed factors of production

(c)        diminishing marginal productivity of variable inputs           

(d)       reduced incentives to work in large plants

7.   When average total cost is declining as output increases, marginal cost must be

(a)        declining                                 (c)        above average total cost

(b)        below average total cost                     (d)       rising

8. Total cost is $30 at 10 units of output and $32 at 11 units of output. In this output range, marginal cost must be

(a)        equal to average total cost                  (c)        less than average total cost

(b)        greater than average total cost                        (d)       indeterminate

9. If the difference between ATC and AVC is $1.00 at 100 units of output, then at 200 units of output the difference between ATC and AVC must be

(a)        $2.00                                                   (c)        $0.50

(b)        $1.00                                                   (d)       indeterminate

Answer 1

Required definition :

Marginal product (MP) is the additional output produced by employing one more unit of input.

Ans 4.) c. 30

Since with a given amount of capital, 1 unit of labor produced 20 units of output. When one more unit of capital is employed, total output produced is 50. So the Marginal product is 50 - 20 = 30 units.

Ans 5.) C. third

diminishing marginal productivity implies that as more and more input is employed, output increases at a decreasing rate i.e additional unit of input produces less output than the previous unit. In our case, MP of 2nd unit is 30 and the MP of third unit is 25.

Ans 6.) c . Diminishing Marginal Productivity of variable input.

In the short run, Marginal cost increases due to diminishing marginal product of variable input, and it decreases due to increasing marginal returns.

Ans 7.) b. Below average total cost

It is a simple logic that when averages are declining, the marginals must be declining more than the average. In economics, when the average cost is decreasing, the marginal cost lies below the Average cost, and when the average cost is increasing the Marginal cost curve be above it. Both intersects where the Average cost is minimum.

Ans 8.) c. Less than average total cost

The average cost at 10 units is 3 (i.e 30/10) and at 11 units it is 2.9 (i.e 32/11). On the other hand, the marginal cost of 11th unit is $2 (i.e $32 - $30 ) . So MC is less than AC.

Ans 9.) c. $.50

Since ATC = AVC + AFC

we can write this as (TC/Q) = (TVC/Q) + (TFC/Q)

We are given that for Q = 100,

(TC/Q) - (TVC/Q) = $1 i.e (TFC/Q) = $1

so for  Q = 100, therefore TFC = $100.

so AFC for Q= 200 is simply equal to (TFC/200) = (100/200) = $.50