1. Cost and Production Review

2. Given the following quantity data, please compute the short-run marginal and average products and costs if labor is $10 per hour and capital is $5 per unit At what quantity of labor does the process experience diminishing returns to labor? At the given prices and a MP K = 10, what is the amount of labor? 3-4 If you are running this plant with 4 workers and another facility with a MPL of 30 should you re-allocate your workers and if so, how? Reduce 1 here and add 1 there If you make this switch, what is the maximum salary you can pay and still produce optimally? $12.50 Interest rates spike due to heavy government debt. You cannot change your wage rate or the interest rate. Do you add (subtract) labor and or capital in the long run? Increase staff to decrease the MP L and decrease capital to increase MP K.

3. A B C D F G H I E L K J What letter(s) on the graph corresponds to the following: Fixed costs Average fixed costs Marginal costs Minimum marginal costs Average variable costs Minimum average variable costs Inflection point Tangency point E F I J D,H K J K,L

4. Match the notation with the name and the graph Production function Optimal production Marginal rate of technical substitution Cost function FG HI J B,I C,D,G A,H E,F

5. Which graph illustrates short term production and which illustrates long term production? If you are applying for a job at the firm illustrated by this graph, and the firm is currently producing at Q1, do you want to be paid your average or marginal product? A = Short term; B = Long term Marginal A B Does this firm achieve minimum average cost at a higher quantity of production in the short or long term? Long term Draw on paper the graph of average and marginal products that corresponds to the short-term graph of average and marginal costs labeling the quantities of Q1 and Q2 appropriately. In your own words, what does the “marginal product of labor” mean? The additional production from one additional unit of labor

6. BONUS: Why doesn’t the long run average cost curve run tangent to the minimum of the short run cost curves? If you are responsible for planning production, how does your thinking about optimal inputs change, or not change, if you are planning in the short run or long run? In the long run all inputs – labor and capital – are variable True or false: The mix of labor and capital to produce Q1 at point A are NOT the optimal mix in the long run. A False: long run cost curves assume optimal inputs