ECO101H1 Lecture Notes - Average Variable Cost, Diminishing Returns, Marginal Cost

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14 Apr 2014
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Short run: variable factor (labour), fixed factor (capital) In short run, marginal product of variable factor eventually declines. Mp increasing => mc decreasing (additional unit) Mp must fall (eventually) => mc must rise (eventually) A firm is producing 500 units of output daily. 8. 00; its average total cost is 7. 5 ; its average variable cost is 4. 00. Tc = atv * q = 7. 50 * 500 = 3750. Tvc = avc *q = 4. 00 * 500 = 2000. 3750 - 2000 = 1750: 7. 5, 750 c)1750 d)3750 e)4750. In short run, gm must hire more workers to increase output ( law of diminishing returns applies) In long run, gm can build more assembly plants as well as hire more workers. Law of diminishing returns does not apply. Mp does not necessarily fall after some point => mc does not necessarily rise. Output doubles (constant returns to scale) => atc in unchanged [only one on test]

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