Question

2. Production theory and cost theory a) You are an employer seeking to fill a vacant position on an assembly line. Are you more concerned with the average product of labour or the marginal product of labour for the last person hired? Explain. (4p) i) ii) If you observe that your average product is just beginning to decline, should you hire any more workers? What does this situation imply about the marginal product of your last worker hired? (4p) b) Explain why the marginal rate of technical substitution is likely to diminish as more and more labor is substituted for capital. (4p) Suppose that labour is the only variable input to the production process. If the marginal cost of production is increasing as more units of output are produced, what can you say about the marginal product of labour? (4p) c) d) The short-run cost function of a company is given by the equation TC-200+55q, where TC is the total cost and q is the total quantity of output, both measured in thousands i) What is the company's fixed cost? (2p) i) If the company produced 100,000 units of goods, what would be its average variable cost? (2p)