Learning Materials
Features
Discover
Chapter 7: Average Costs (page 237)
In the average cost curve, there is a point where production reaches a minimum. What is that minimum called?
The minimum is referred to as the optimum level of output or productively efficient level of output.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
You manage a plant that mass-produces engines by teams of workers using assembly machines. The technology is summarized by the production function q = 5KL where q is the number of engines per week, K is the number of assembly machines, and L is the number of labor teams. Each assembly machine rents for r = \(10,000 per week, and each team costs w = \)5000 per week. Engine costs are given by the cost of labor teams and machines, plus $2000 per engine for raw materials. Your plant has a fixed installation of 5 assembly machines as part of its design.
What is the cost function for your plant—namely, how much would it cost to produce q engines? What are average and marginal costs for producing q engines? How do average costs vary with output?
How many teams are required to produce 250 engines? What is the average cost per engine?
You are asked to make recommendations for the design of a new production facility. What capital/ labor (K/L) ratio should the new plant accommodate if it wants to minimize the total cost of producing at any level of output q?
The cost of flying a passenger plane from point A to point B is $50,000. The airline flies this route four times per day at 7 am, 10 am, 1 pm, and 4 pm. The first and last flights are filled to capacity with 240 people. The second and third flights are only half full. Find the average cost per passenger for each flight. Suppose the airline hires you as a marketing consultant and wants to know which type of customer it should try to attract—the off-peak customer (the middle two flights) or the rush-hour customer (the first and last flights). What advice would you offer?
A firm has a fixed production cost of \(5000 and a constant marginal cost of production of \)500 per unit produced.
What is the firm’s total cost function? Average cost?
If the firm wanted to minimize the average total cost, would it choose to be very large or very small? Explain.
Suppose that a firm’s production function is q = 10L1/2K1/2. The cost of a unit of labor is \(20 and the cost of a unit of capital is \)80.
The firm is currently producing 100 units of output and has determined that the cost-minimizing quantities of labor and capital are 20 and 5, respectively. Graphically illustrate this using isoquants and isocost lines.
The firm now wants to increase output to 140 units. If capital is fixed in the short run, how much labor will the firm require? Illustrate this graphically and find the firm’s new total cost.
Graphically identify the cost-minimizing level of capital and labor in the long run if the firm wants to produce 140 units.
If the marginal rate of technical substitution is K/L, find the optimal level of capital and labor required to produce the 140 units of output.
A recent issue of Business Week reported the following: During the recent auto sales slump, GM, Ford, and Chrysler decided it was cheaper to sell cars to rental companies at a loss than to lay off workers. That’s because closing and reopening plants is expensive, partly because the auto makers’ current union contracts obligate them to pay many workers even if they’re not working. When the article discusses selling cars “at a loss,” is it referring to accounting profit or economic profit? How will the two differ in this case? Explain briefly.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Exams 
GCSE 
IGCSE 
AS 
A Level 
International A Level 
University Admissions Tests 
Flashcards 
Vaia AI 
Notes 
Study Plans 
Study Sets 
Find a job 
Find a degree 
Student Deals 
Magazine 
Mobile App