Question

Question 4: (5 Marks) A firm's production function is described by the isoquant map below. The wage rate is $3 and the rental rate of capital is $6. Capital 4 x 3 2 00 11 10 4 6 8 Labor a) Draw the firm's LR total cost curve. Label the points that correspond to points A, B and C in the figure and the coordinates of each point. (2 Marks) b) Draw the firm's LR average cost curve. Label the points that correspond to points A, B and C in the figure and the coordinates of each point. (1 Mark) c) What can you say about the existence of economies or diseconomies of scale in this industry? EXPLAIN. (2 Marks)

Answer 1

coage rate (w)=$3 ; rent al rete of capital (2)=$6 x 3 11 ។ Labor a) The equction isotost line The iso cost line for out but u touch at og point A w L= (c) Totul est = cost at Intercepts fr-c) Total costa 314) = 12 So for q=4 T.C=12 similarly for output to Iso cost touch at point B Toc = whz316)= 18 for q=10 T.c=18 similarly for output 11 Isocot touch at point c- tocz W L = 1378)= 24

figure I Pg. No. Thel wst 124 LR stal wasta y 11, 24) 122 Do B "110,1") 16 ty 12 A 144,127 to 6 ch 4 2 6 2 + ។ glout but) 12 6 b) Arerage lost vest for = 4 2 ۹ A.C=TC 12 3 q 4 18 1.8 q A-C=TL = 24 = 2.18 il Average cost for q = 10; A. C = Tc Average wat for q = 11 10 q

Long Run Arenge cost A (4,3) 12.5 3 2 (11,219 2 tos Blight) 1 0.5 + ) 2 ។ 6 gloutput) f 12 Yun Average cost is c) for output u to lo there is economies of scele as the long decreasing for output to to 11 there is diseconomies of the long run Average increasing. scale as Lost is