Question

Bob Thomason produces theorems using hours of labor and Big Machines. In the short run, his labor is a variable factor but the number of Big Machines is fixed. When he works for L hours using M Big Machines, Bob can produce L·M theorems. There are only 3 Big Machines in the world, and they can only be rented in whole number quantities (you can not employ 1/2 of a Big Machine). Bob's time is worth $1 per hour, and it costs $1 per hour to rent a Big Machine. Draw Bob's short run total cost curve on the assumption that he employs 1 Big Machine. Do the same on the assumption that he employs 2 Big Machines. Do the same on the assumption that he employs 3 Big Machines. Draw Bob's long run total cost curve. Repeat questions 6 and 7 with “total cost" replaced by “average cost." Repeat questions 6 and 7 with “total cost" replaced by “marginal cost." Suppose that a firm experiences constant returns to scale at all levels of output. True or False: Whenever the firm increases its use of inputs, its output expands proportionately. Thus this firm never experiences diminishing marginal returns to labor. True or False: If the price of haircuts rises from $10 to $11, consumers' surplus will fall by 10%.

Answer 1