Question

1. Consider two firms, Stinky and Foul in the same industry who use the same production technology. To produce the same level of output, say 1000 pairs of socks, Stinky uses more capital than Foul and Foul uses more labor than Stinky. Suppose both companies pay the same wage to their employees: w = 15. (Unless otherwise stated, assume that all firms choose their input levels optimally) (a) (2 points) Which company is paying a lower rent? Why? (b) (1.5 points) Which company has a higher cost? Why? (c) (1.5 points) At their current optimal input bundles, the marginal product of labor is higher for which firm? Why? (d) (1.5 points) At their current optimal input bundles, the marginal product of labor is lower for which firm? Why? (e) (2 points) Circle the correct answer and provide a brief explanation. If the wage rate doubles, firms' costs will MORE THAN LESS THAN / EXACTLY double. 2. Consider a firm with the technology f(KL) = K L Suppose the capital is stuck with 16 units of capital in the short-run. Suppose that the wage rate (w) is $4 and the rental rate (r) is $8. (a) (1 point) What is the firm's marginal product of labor? (b) (2 points) What is the short-run cost function? (c) (2 points) Draw the firm's average variable cost and marginal cost curves. (Make sure to Now assume that the firm is operating in the long run. (d) (4 points) Derive the firm's long-run cost function (e) (9.5 points) Draw the firms' supply curve. Make sure to label the axes.

Answer 1

Answex Ca) labor is having higher securing rost a it is costly in terms of input cost .. More advanced technologies are into by the capital & This says an huge initial cost but in the long distance it is cheaper than labor y Economic vent is the excess cost paid for the use of That resource as compared to the equilibrium level Stinky uses more capital and it pay & low rent * By The given Information here fout is handling more labor to The production, Here Both the companies gives same output with same technologies using but Here Stinky is getting same output with less labor

② * to be expensive Foul has a higher The in cost labor is tend the long run so of operation * Here Both The companies are having same level of output but stinky is employing tower labor .. t Due to one unit of additional labor The Marginal product of the labor is the additional output generated here. * As The stinky is getting the same output with lower labor * It means it has a higher Marginal product of labor. * the labor is The adlitional because of an additional & Marginal product of output Generated unit of tabor. Foil is employing output of Stinky Foul has a lower labo more labor for same level by This we know that Marginal product of