Frank 5th ed Ch 11 Problems 12 4th ed Ch 11 Problems 12 In t

(Frank 5th ed. Ch. 11 Problems, #12; 4th ed. Ch. 11 Problems, #12)

In the short run, a perfectly competitive firm produces output using capital services (a fixed input) and labour services (a variable input). At its optimal level of output where p = MC, the marginal product of labour is equal to the average product of labour.

a)     What is the relationship at the optimal point between this firm’s average variable cost and its marginal cost? Explain.

b)     If the firm has 10 units of capital and the rental price of each unit of capital is $4 per day, what will be the firm’s profit? Should it remain open in the short run? Explain.

Solution

a. When MC is less than AVC, AVC is decreasing and when MC is more than AVC, AVC will be increasing.

b. If the price is greater than AVC, the company should stay in business. In this case price at which producer sels the product and minimum AVC must be found .