Question 1 (b)

o u Graphing long-run ATC: The gray curves represent all the SR ATC curve the firm experiences as it opens new plants. As it opens its first 10 plants, ATC declines, while for plants 1 1-16 ATC remains constant. Beyond 16 plants the firm's ATC begins to rise, indicating it has gotten too big. c Diseconomies of scale Economies of scale Constant returns to scale MES

Question 2 (b)

  • For a company in a perfectly competitive factor market, the marginal factor cost for the company equal to the equilibrium wage on the market because the company is a wage taker and the market sets the wage.

Question 2 (c)

  • The value of the marginal product of a factor is the value of the additional output generated by employing one more unit of that factor.

    • VMPL = Value of the Marginal Product of Labor

    • MRP = Marginal Revenue Product

  • Hiring decision rule

    • Hire the extra worker if VMPL >W

    • VMPL = W at the profit-maximizing level of employment

    Wage rate, VMPL $400 300 Market 200 wage rate 100 1 2 3 4 5 Optimal point 6 7 Value of the marginal product of labor curve, VMPL 8 Quantity of labor (workers) Profit-maximizing number of workers

  • This curve shows how the value of marginal product of labor depends on the number of workers employed.

  • It slopes downward because of diminishing returns to labor in production

  • To maximize profit, you should choose the level of employment at which the value of the marginal product of labor is equal to the market wage rate

Question 3 (b)

  • The after-tax price received by sellers: intersection of QT(Quantity produced after tax imposed) and S

    QTQE S+Tax QUANTITY

Question 3 (d)

  • The tax burden will fall more on buyers and less on sellers because the demand curve is more inelastic than the supply curve.

    Inelastic Demand 2. Buyer's Tax Incidence Supplier's Tax Incidence Buyer's Tax Incidence Supplier's lax Incidence 8 4 3. st Buyer's Tax Incidence Supplier's Tax Incidence Quantity Inelastic Supply st s Buyer's Tax Incidence Supplier's Tax Incidence thismatter.com 8 8 Q Q Quantity Elastic Demand s Quantity Elastic Supply st s Quantity

    p0@) p s(qt) BL\>SL BL = Buyers' Loss SL = Sellers' Loss

    BL<SL BL = Buyers' Loss SL = Sellers' Loss po(qt) SL

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