Question

1) A firm uses two inputs in production: capital and labor. In the short run, the firm cannot adjust the amount of capital it is using, but it can adjust the size of its workforce.
If the cost of renting capital increases, which of the following curves will be affected? (Check all answers that apply)

a) Average fixed cost

b) Marginal cost

c) Average total cost

d) Average variable cost

2) If the cost of hiring workers increases, which of the following curves will be affected? (Check all answers that apply).

a ) average variable cost

b) average fixed cost

c) average total cost

d) marginal cost

3) The market for fertilizer is perfectly competitive. Firms in the market are producing output, but are currently making economic losses.

Fill in the following blanks with A = above, E = equal to, B = below.

From the previous statement, we know that the market price of fetilizer is ............ average total cost, .............. average variable cost, and ............. marginal cost.

Answer 1

1. Option a and c.
(Capital is fixed input so change in cost of capital changes average fixed cost and average total cost. MC is change in total variable cost so it remains same.)

2. Option a, c, and d
(Labor is variable input so change in cost of labor changes average variable cost and average total cost. MC is change in total variable cost so it also changes.)

3. B; A; and E
(If there are economic losses then P < ATC and as firm is producing so P > AVC and P = MC)