ANSWERS TO RELEVANT STUDY QUESTIONS CHAPTERS Review Questions 1. We ssi that the production function tells us the maximum output that a firm ean produce with ts ies of inputs. Why do we include the word maximum in this definition? ‘The production function tells us the maximum volume of output that may be produced given a combination of inputs. Its possible thatthe firm might produce less than this amount of output due to inefliient management of resources. While its possible to produce many levels of output withthe same level of inputs, some of which are less technically efficient shan others, the production function gives us the upper bound on (the ‘maximum of) the level of output 5, Why must an soquant be downward sloping when both labor and capital have postive marginal products? Ifthe marginal product of labor is positive, then when we increase the level of labor holding everything cise constant this will increase total output. To keep the level of ‘output a the original level, we need to stay on the same isoquant. To do so, sine the ‘marginal product of capita is positive we would then need to reduce the amount of | capital being used. So, to keep output constant, when the level of one input increases the level ofthe other input must decrease. This negative relationship between the inputs nplies the isnquant wil have a negative slope, J, he downward sloping 6, Could the Isoquantscorressonding to two different levels of output ever cross? 'No, as with indifference curves, isoquants ean never cross. For example, suppose we raw isoquants for two levels of output O, and Q, with Q, > Q,. In addition, suppose ‘that these isoquants crossed at some point Aas in the following diagram. Capital Labor Because A and B are on Q, both achieve the same level of output. Since A and Care on (Qj, both achieve the same level of output. This would imply that B and C achieve thesame level of output, However, this is not possible since point C contains more of both inputs which would achieve a higher level of output, Therefore, isoquants cannot cross. 8, Suppose the production of electricity requires just two inputs, capital and labor, and thatthe production function is Cobb-Douglas. Now consider the soquants corresponding to three diferent levels of output @ = 100,000 dlowatt-hours,@ = 200,000 klowetthours, and Q = 400,000 kilowatt- hours. Sketch these soquant: under three different assumptions about returns to scale: constant returns to seale, increasing returns to scale, and decreasing returns to scale. Decreasing Returns to Scale Capital With decreasing retums to seal the firm needs to more thaa double inputs to dout ‘output, Equivalently, doubling inputs less than doubles output Constant Returns to Scale 1,000 750 500 Capita } 250 : 250 500 750 Labor ‘With constant returns to scale the firms needs to double inputs to double output.Increasing Returns to Seale {9-100,000 200,000 400,000 ¥ 1,000 750 500 Capital 250 With increasing returns to scale the firm needs to less than double the inputs to double the ‘output. Equivalently, doubling inputs more than doubles output. Problems 6.1 fem uses the inputs of fertilizer, labor, and hothouses to produce roses. Suppose that when the «quantity of labor and hothouses Is fted, the relationship between the quantity of frtlizer and the number of roses produced ispven by the following table: Tomsof — Numberof—_Tontof’—_ Number of Fertiizer — Rotet ertiizer Roser perMonth perMonth _perMonth per Month ° ° s 2300 1 500 ‘ 2600 2 000 7 2300 3 700 8 2000 4 2200 2} What isthe average product of ertilzer when 4 tons are used? b) Whats the marginal product of the sith ton of fertilizer? €) Does ths total product function exhibit diminishing marginal returns? Is, over what quantities of fertilizer do they occur?4) Does this total produc function exhibit diminishing total returns? so, over what quantities of fertilizer do they occur? 2) AF 2a BM s59, nal AQ _ 2600-2500 _ 195 Me, =A BO ©) Diminishing marginal returns set in wher. MP, for some unit is lower than MP, forthe previous unit, This occurs for F >3. 8 Diminishing total retums set in at the point where total output begins to fll. This ‘occurs for F> 6 = fillin the following table and state how much the firm 63. For the production function should produce so that: 2) average product is maximized »b) marginal products maximized «total product is masimized average productis zero ‘The completed tableis shown below: c Q 0 ° 1 5 2 6 3 7 4 2 s 252) Youcan calcalate the average product at each point by just dividing total output by L. The values obtained are 0,5,8,98,5,0. Therefore Average Produet is maximized when L 3 1) The marginal product at values | through 6 are respectively: 5,11,11,5,-7, 28. ‘Therefore boh the second and the third unit ofL. give the greatest marginal increase in oxtput [i you use calculus techniques it ean be seen that marginal product is meximized when Z = 2}. ©) From the Table it is clear that total product is maximized when L = 4, 4) Average Product willbe zero only when Total Product is zero. Tis happens when L=6. ‘6.4. Suppose thatthe production function for DVDs is glven by Q= KE"1?, where Qs the number of disks produced per year, Kis machine-hours of capital, and Ls man-hours of labor. 2) Suppose K = 600 Find the total produc function and graph it over the range L = Oto L= 500. Then sketch the graphs ofthe average and marginal product functions. At what level of labor Ldoes the average product curve appea to reach ts maximum? At what level does the marginal produet curve appear to reach ts maxmur? 1b) Replicate the analysis in] forthe case in which K= 1200. ‘) When either K = 600 or K= 1200, does the total product function have a region of increasingTotal Product with K=600 35,000000 30,000000 25000000 201000000 15,000000 1}000000 5,000000 ‘Total Product { = 0 200 400 600 800 Labor AP and MP with K=600 200,000 ee - 2,100,000) 200 400 600 500 200,000; {60,00 (400,00 MP Labor [Based on the figure above it appears thatthe average product reaches its ‘maximum at = 300. The marginal product eurve appears to reach its maximum at L = 200, »‘Total Product with K=1200 300,000,000 250,00,000 200,000,000 150,000,000 100,090,000 000 ‘Total Product o 500 1000 1500 Labor { AP and MP with K=1200 1,000,009 > 00.000 | ap Based on the figure above it appears thatthe average product curve reaches its ‘maximum at = 600. The marginal product eurve appears to reach its maximum at = 400 ©) Inboth instaces, for low values of £ the total product curve increases at an increasing rae. For K = 600, this happens for L < 200. For K = 1200, it happens for L-< 400 65. Are the following statements corrector incorrect? 2) average products increasing, marginal product must be less than average product. pf marginal product is negative, average product must be negative. «) average producti positive, total product must be rising4) total products increasing, marginal product must also be increasing, a » 9 Incorrect. When MP> AP we know that AP is inereasing. When MP < AP we ‘know that 4? is decreasing. Incorrect. If MP is negative, MP <0, ButAP = Q/I.can never be negative singe total poduct Q and the level of input L ean never be negative. Thus, MP < 0< AP, whiea only implies that AP is falling Incorrect. Average produc is always positive, so ths tells us nothing about the change in total product. Whether or not total products rising depends on ‘whether or not marginal product is positive. Incorrect. IFtotal product is increasing we know that MP >0. If diminishing ‘marginal retums have set in, however, marginal product willbe positive but sleereasing, bt that does not preclude MP > 0, 6.7. The following table shows selected input quantities, total products, average products, and ‘marginal products. Fillin as much ofthe table as you ean: abort abort 0 2 B Total product.@_ ARMA ° a= ” » % ys v9 oo oo Total product. AR MP, 96 ct 100 1089 8 %“The correct answers are shown in bold face red type. Tabor, | Totaproduct,@ AR, iP ° 0 0 = T w Fry w z 7 3 3 3 cry 3 z 255 e 08 5 aS % as 6 308 & i 7 7 o cer ® 768 % cre 3 ot oa FT) 00 a Ht 7089 98 co 2 ns % @ 2 ne o a Fr 76 a 7 w m5 5 aT 6.8, Widgets ae produced using two inputs labor, and capital, K. The following table provides Information on how many widgets can be produced from those Inputs:10 2) Use data from the table to plot sets of input pals that produce the same numberof widgets. Then, carefull, sketch several ofthe soquants associated with this production function. »b) Find marginal products of Kad Lfor each pair of inputs in the table «€) Does the production function in the table exhibit decreasing, constant, or increasing returns to scale? 2) Three sampleisoquants: red for production of 4 widgets (Q= 4), green for production of £8 widgets (Q= 8), and bie for production of 12 widgets (Q = 12). The dots represent particular combinations of input. 1) Recall that marginal product of an input, say labor, is given by AYA f we compute the ‘marginal procuct of labor and capital at any point inthe table, we find tat It always ‘equals 2. For example, in moving from input combination (2,2) to (32), we increase ‘output from to 10. Hence, MP, = (10 ~8)/(3~2u ©) From the tale, we see that as we increase the quantity of each input by a gen proportion, the quantity produced increases by the same proportion. Hence, in moving from input combination (1,1) to (3,3), we are tripling the quantity of labor and capital used, Asa esl, the quantity of output produced triples aswel, 65.9 Suppose the production function for automobiles is Q = LK where @ isthe quantity of automobiles produced per yes, Ls the quantity of labor (man-hours) and Kis the quantity of capital (tmachine-hours). a. Sketch the isoquant corresponding to a quantity of Q= 1007 What is the general equation for the isoquant corresponding to any level of output Q? Does the isoquant exhibit diminishing marginal rate of technical substitution The Q= 100 isoquatt looks like this: quant of aptl ‘auanty a abor 'b. We find the general equation of an isoquant for this production function by starting with the production function and solving for Kin terms of F, Thus, snce Q LK, the generat uation ofan soqunt fr this production fnction is @ a The ioquans for this roducton function exit nisin maria rat of tecnica substation, \Wecan see thisfrom he rp above which shows thatthe Hoquants convex the on2 6.12. Consider again the production function for DVDs: Q= KL?=P. 2) Sketch a graph ofthe isoquants for this production function. ') Does this production function have an uneconomic region? Why or why not? a ano | 180 100 150 O50 Capital Labor ) Because ack ofthese isoquants hasan upward-sloping portion beyond some level of labor, each one does indeed have an uneconomic region. 6.12. Suppose the productior functions given by the following equation (where a and b ae positive + bk. Whatis the marginal rate of technical substitution of labor for capital (OMA. a any point along an isoquant? For this production function MP, =a and MP, =b. The MRTS; < is therefore 6.13. You might thnk that when a production function has a diminishing marginal rate of tochnical substitution of labor for capital it cannat have increating marginal products of capital and labor. ‘Show that this snot true, using the production function Q = Kt, with the corresponding marginal products MPe 2KI! and MP.= 24°. First, note that MRT; = L/K, which diminishes as increases and K falls as we move along an isoquant So MMR7S; is diminishing. However, the marginal product of capital MP is increasing (vot diminishing) as K increases (remember, the amount of labor is held fixed when we measure MPs.) Similarly, the marginal product of labor is increasingB as L grows (again, because the amount of capital is held fixed when we measure MP). This exercise demonstrates that itis possible to have u diminishing marginal rate of| ‘technical substitution even though both ofthe marginal products are increasing 6.17 Let Be the numberof bicycles produced from Fbicyle frames and Tires. Every bicycle needs ‘exactly two ties and one frame. 42) Draw the isoquants for beyle production. b) Write a mathematical expression fr the production function for biydes. 8) This isoquants for this situation will be L-shaped as inthe following diagram Frames ipeaees ‘These L-shaped isoquants imply that once you have the correct combination of inputs, say 2 frames and 4 tres, additional units of one resource without more “units ofthe ther resource will not result in any additional output. ) Mathematically this production funetion can be written 1 Q= mine 37) where F ane represent the number of frames and tres. 6.18. To produce cake, you ned eggs F and premixed ingredient /. Every cake needs exactly one gg, and one package of ingrediens. When you add two egs to one package of ingredients, you produce ‘only one cake. Similarly, whes you have only one egg, you can't produce two cakes even though you hhave two packages of ingredients. 2) Draw several izoquants ofthe cake production function. ‘by Write a mathematical expression fo this production function. What can you say about returns to sale of this function?a » u ‘The formula is # of cakes = Mint of ens, Hof ingredients’ packages}. This production function has constant returns to scale. To see why, let x and y dnated the quantities of eggs and mi, respectively, and let Q denote the number of cakes produced. The equation of cur production function is: Q = Min(xy). we increase each input by 2 factor of 0, we have the following quantity of cake: ‘min(or, 07) =0 mints, y) = 00. Hence, increasing the quantities of inputs by a glen proportion resus in the same proportionate increase in output, and the production function thus exhibits constant returns to scale15 6.19, What can you ay aboutthe returns to scale of the linear production function ‘and bare postive constants? K+ BL, where If we were to scale pall inputs by a factor 2 (that is, replace K by AK, and L by 2), the resulting output woud equal 40. Therefore a linear production function has constant returns to scale, 6.20. what can you say aboutthe returns to scale of the Leontef production function where a and 6 are postive constants? info, bt), A general fixed proportions production function is ofthe form Q = min(aK,6L). If we ‘were to scale up all inputs by a factor 2 (Oat is, replace K’by AK, and L by AZ), the resulting output would be min(aAK,bAL) = 2 min(aK,,bL)~ 2Q. Therefore the production function nas constant returns to scale. 6.23. A firm's production function is @ = St?°K with MPy = (5/3)224* and MP, = (20/3)UK, 8) Does ths production function exhibit constant, increasing, or decreasing returns to scale? 'b) What isthe marginal rate cf technical substitution of for K fortis production function? a) Notice that (oxy%at)"* = aia K: 2! = g K! 2 = a0, This production function exhibits constnt returns to sae by MATS e= MPI MEc= 2 KL16 aPreR7 Review Questions 4. How does an increase inthe price ofan Input affect the slope ofan isocost line? A fi’s total costs are TC =rK + vl 0th equation for typical soso ln is Kee, Since the slope ofthe isco ine is given by —»/r, if the price of labor inereases the isoost line will become steeper anc ifthe pie of capital increases the socost ine will become ate. 6.Explan why, at an interior optimal solution to the firms cost minimization problem, the addtional ‘output that the firm gets from a dollar spent on labor equals the addtional output from a dollar spent ‘on capital. Why would ths eanltion not necessarily hold ata corner point optimal solution? ‘To understand wiry at an inrior optimum the additional output the firm gets from a dollar spent ‘on labor must equal the additional output the firm gets from a dollar spent on capita, assume these were not equal. For example, suppose the fm could get more output from a dolar spent ‘labor than on a dollar spet on capital. Then the firm could take one dollar away from capital and reallocate ito labor. Since the firm gets more output from a dolla of labor than fom a 100 ‘This implies that the finm reeives more output per dollar spent on an additional machine hour of fermentation capacity than for an adltional hour spent on labor. Therefore, the firm could lower cost while achieving the same level of output by using fewer hours of labor and more hours of fermentation capacity. 75. Affirm uses two inputs, capital and labor, to produce output. ts production function exhibits 2 iminishing marginal rate of echnical substitution. 2) f the price of capital and bor services both increase by the same percentage amount (eg,,20 percent), what will happen ta the cost-minimizing input quantities fr a given output level? ) if the price of capital increases by 20 percent while the price of labor Increases by 10 percent, what ill happen tothe cost-minimizing input quantities fora given output level? 8) Ifthe price ofboth inputs change by the same perventage amount, the slope af the isocast line will not change. Since we are holding th level of output fixed, the isocost line will be ‘angen to the isoquant atthe same point as prior tothe price ineease, Therefore, the cst- ‘minimizing quantities ofthe inputs will not change. b) Ifthe price of capita increases by a larger percentage than the price of labor, then, relatively speaking, the price of labor has become cheaper. ‘The firm will substitute away from capita and add labor until ether the tangeney condition holds ora comer solution is reached, 79. Suppose the production of airframes is characterized by a Cobb-Douglas production function: 1X. The marginal products for his production function are MP, =K and MP, =. Suppose the price of labor s $10 per unit and the price of capital i $1 per unit. Find the cost-minimiting combination of labor and capital f the manufacturer wants to produce 121,000 airframes. ‘The tangency condition impies K 1-* TL lore=K Substituting into the producion funetion yields8 121,000 = LK 121,000 » £102) 121,000 = 1017 Since K=10L, K=1,100. The cost-minimizing quantities of labor and capital to produce 121,000 airframes are K'=1,100 and £=110. 7.40. The processing of payrell forthe 10,000 workers ina large fm can ether be done using 1 hour ‘of computer time (denoted by K) and no clerk or with 20 hours of clerical time (denoted by L) and no ‘computer time. Computers and clerks are perfect substitutes; for example the firm could also process its payroll using 1/2 hour of computer time and 5 hours of clerical time. 2) Sketch the izoquant that shows all combinations of clerical ime and computer time that allows the firm to process the payroll for 10,000 workers. 1) Suppose computer time cots $5 per hour and clerical time casts $7.50 per hour. What are the cot: ‘minimizing choices of Land K? What fs the minimized total cost of procestng the payrol? «) Suppose the price of clerical time remains at $7.50 per hour. How high would the price of an hour of ‘computer time have tobe belore the firm would find t worthwhile to use only clerks to process the payroll? a) ‘K and L are perfect substituies, meaning thatthe production function is linear and the isoquants ‘are straight lines, We ean write the production function as Q = 10,000K + 10002, where Q is the number of workers for whom payroll is processed. b) _Ifr=5 and w=7.5), the slope ofa typical isocos line will be ~7.5/5.0=-1.5. This is steeper than the isoquant implying that the fim will employ only computer time (C)t019 ‘minimize cost. The cost miaimizing combination is in the graph below. The isozost lines are the dashed lines. This outcome can be seen ‘The total cost to process the payroll for 10,000 workers will be TC =5(1)+7.5(0) ©) The firm will employ clerical time only if MP: /w> MP /r, Thus we need 0.1 /7.5> Mrorr> 75. 7.41, A firm produces an output wth the production function Q= KE, where Qs the numberof units ‘of output per hour when the firm uses K machines and hes L workers each hour. The marginal products fortis production function are MP= Land MP, =K. The factor price of Kis 4 and the factor pre of Lis 2. The fem i currently using K'= 16 and just enough Lto produce Q = 32. How much could ‘he frm save fit were wo aust Kand to produce 32 units nthe eas costly way possible? ‘curenty the frm must be using {= Q/K = 32/16 =2 units of labor. Let the factor prices of capital and labor be, respectively, rand w: Its total expenditure C= wl rk = 2(2) + 4(16)= 68, Irie were to minimize cost, would hire Land Ks that (2) MPy/r= MP /w, oF U4 =4/2 oF. ak (2) and (2) imply that And b= 8, 50 Q=32 canbe produced effienty witha cost of =e +r =2(8)+ 8) ‘The fim could save 683: 36 by producing eficenty. ‘72, Afirm operates withthe production function Q=K'L Qis the number of units of output per day when the frm rents Kunis of capital and employs L workers each day. The marginal product of capitals 2kt, and he marginal product of labor sk". The manager has been glven ‘a production target: Produce 3,000 units per day. She knows that the daily rental price of ‘capitals $400 per unit. The wage rate pad to each workers $200 day.20 {2} Currently the frm employsat 80 workers per day. Whats the fr’ day total cost iit rents just enough capital to produce tits target? +b) Compare the marginal product per dollar sent on K and on L when the firm operates at the Input choice in part (a). What does this suggest about the way the frm might changeit choke ‘of K and Lift wants to reduce the total cost meeting Its target? «In the long run, ow much KandL should the firm choose if t wants to minimize the cost of producing 8,000 units of output day? What wl he total daily cost of production be? 48) Suppose thatthe fm is operating inthe short un, with L= 80. To produce Q = 8000, how ‘muh K wilt equire? From the production function we observe that 000K" (0) <> 10. ‘The total cost woud be 52080) + $400(10) = $2,000 per day. Len ») Let's examine the "bang forthe buck” forKand Lwhen K=10 and L= 80. For capital: MPx/ r= 2KL/ 400=2(20)(80)/ 400 =4 Forlabor: MP,// wk / 200.10 /200=0.5 So the marginal product per dolar spent on capital exceeds tat of labor. The firm would like to ‘ent more capital and hire fewer workers. Because the production function is Cobb-Douglas, we know that ithas diminishing MRTS,< and that the isoquants do notintersect ether the Kor Lax. Thus the cost educlng basket (KL) will be interior (with K> O andl. > 0). To find the optimum, we se the two conditions: (1) Tengency condition: MPc/MP.=+/w => 2KY/K?= 400/200 => K=L (2) Production Requirement: X°L= 8000 Together equations (1) and 2 telus that K= 20 and 20. ‘The total cost would be :200(2) + $400(20) = $12,000 per day Len 7.6. Aconstruction company ha two types of employees: sled and unskilled. A sklled employee ‘an build 1 yard ofa brick wal in one hour. An unsklled employee needs twice as much ime to bulld the same wall The hourly ware ofa siled employee Is $15. The hourly wage ofan unskilled ‘employee is $8.a {2} Write down a production faction with labor. The inputs are the number of hours of skilled workers, the number of haurs worked by unskilled employees , and the outputs the numberof Yards of brick wall, Q. 'b) The firm needs to bull 10 yards of a wall. Sketch the icquant that shows all combinations of skilled and unskilled labor tet result in building 300 yards ofthe wal. «) What isthe cost minimizing way to bulld 100 yards ofa wall? tustrate your answer on the graph in part). 3) The production functions @» Ls +% Ly where Ls denotes hours worked by skied workers and Lydenotes hours worked by ursklled workers, Both types of labor ace perfec substitutes b) The soquant i straght ine & 00h Isoquant representing 100, yards of wall, 5h 200h ly ©) MP,/u = 1/15; Pf, =0.5/8= 1/16. Thus the “bang forthe buck” ihigher for skied labor, and the firm wil use only sled abor Note that the total cost of building 100 yards with sled labor Is (100 hours) $15/ hour) = $1500. ‘The total cost of building 100 ards with unskilled abor is (200 hours\.S8/ hour The socost tne representing : $1500 expenditure i drawn a a dotted ine inthe graph in (b). The |socost line is more steeply sleped than the soquant inthe graph because the marginal ate of technical2 substitution of unskle labor for unskilled labors equal to ¥, while the rato of input prices is equal to as. 7.31, Acme, In. has just completed a study of ts production process for gadgets. It uses labor and capital to produce gadgets. thas determined that 1 more unit of labor would increate output by 200 gadgets. However, an addtional unt of capital would increase output by 150 gadgets f the current price of capitals $10 and thecurrent pice of labor is $25, the firm employing the optimal input ‘bundle frit current output? Why or why not? If not, which input’ usage shouldbe Increased? ‘The information in the problem tells us that MP, = 200 and MP So MP;/w = 8-IMPgir= 2/2 1. Thus the firm cannot be minimizing its long-run total cost. By employing more labor and less capital, it could maintain 32 units of output while lowering total costs.23 CHAPTERS Review Questions 1. What is the relationship between the solution tothe firms long-un costminimization problem and the long-run total cost curve? ‘The long-run total cost cure plots the minimized total cost for each level of output holding input prices fixed. In other words fora given set of input prices, the long-run total cost curve represents the total cost assciated with the solution tothe long-run cost minimization problem foreach level of output. 2. Explain why an increase Inthe price of an input typically causes an increase in the long-run total ‘cost of producing any particular level of output. ‘When the price of one input increases, the isocost ine fora particular level of total cost will rotate in toward the origin. Assuming the isocost line was tangent tothe isoquant forthe fie's selected level of output, when the isocost line rotates it will no longer touch the orginal isoquant In order for an isocost linet reach a tangency with the original isoquant, the firm would need to ‘move to an isovost lin associated with a higher level of eos, fe. an isocost line further to the northeast. 2. the price of labor incresta by 20 percant, but all ather input prices remain the same, would the long-run total cost at a particular output level go up by more than 20 percent, ess than 20 percent, or ‘exactly 20 percent? If the pries of ll inputs went up by 20 percent, would long-run total cost go up bby more than 20 percent, lssthan 20 percent, or exacty 20 percent? If the price ofa single input goes up leaving all other input prices the same and the level of ‘output constant, total cost will rise but by a smaller percentage than the inerease inthe input price. This occurs because the firm will substitute away from the now relatively more expensive labor tothe nov relatively ess expensive other inputs. So, i the price of labor rises by 20% ‘holding all other input prices constant, total cost wil rise by less than 20%. If the prices ofall inputs goup by the same percentage, total cost will ise by exactly that same percentage. So, if input prices rise by 20%, total cost will also rise by 20%, {4 How would an increase in:he price of labor shift the long-un average cost curve? An inerease inthe price of ibor would result i a long-run total cost curve that lies above the inital long-run total cost cue at every quantity except = 0. Since AC = TCO, increasing ‘total cost will raise average cost at every quantity except Q=0. Therefore, the long-run average cost curve wil shift up,2 5. a) the average cost cure is increasing, must the marginal cost curve lie above the average cost curve? Why or why not? ) ifthe marginal cost curve isinereasing, must the marginal cost curve le above the average cost curve? Why or why not? 8) When MC> AC, average cost is increasing, and when MC < AC , average cost is 5). 8.26. Ashort-cun total cost curve is glen by the equation STE(Q) = 1000 + 50a". Derive expressions ‘or, and then sketch, the corresponding short-run average cost, average variable cost, and average ‘xed cost curves. Graphing SAC(Q), APC(Q), and AFC(Q) yields 1200.00 SAC | wo0.00 800.00 600.00 4 400,00 “AVC, 200.00 + 0.09 1, = 0.00 500 10.00 15.00 20.00 Q Cost 8.27. A producer of hard sh dives hs a short-run total cost curve given by STE(Q)= K+ @'/K ‘Within the same set of axe, sketch a graph of the short-run average cost curves for three different plant sizes: K= 10, = 20, and K= 30. Based on this graph, whats the shape ofthe long-run average costcurve?2 SACy—SACiy Since each of these short-run average cost curves reaches a minimum at an average cost of 2.0, the long-run average cost curve associated with these short-un curves will be a horizontal line, tangent to the botiom of each ofthese curves, a a long-run average cost of 2.0,