Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

MIDTERM EXAMINATION 181
3.
(a) L TP L AP L MP L
0 0 0 —
1 2 2 2
2 6 3 4
3 12 4 6
4 16 4 4
5 18 3.6 2
6 18 3 0
7 16 2.29 –2
Fig. M-2
(b)
(c)
The law of diminishing returns for L begins to operate where MP L begins to decline. A rational producer will
produce at stage II for L and K, where the AP and MP of L and K are both positive but declining. The producer
will not produce in stage I for L because MP K is negative. Similarly, the producer will not produce in stage III for
L because MP L is negative. See Fig. M-2.
The slope of the isoquant is
( ) TO=P K
TO=P L
¼ (
) TO
P K
P L
TO ¼ (
) P L
P K
¼ ( ) 1 2
The condition for producer’s equilibrium is
(þ)MRTS LK ¼ (
) MP L
MP K
¼ (
) P L
P K
That is, at equilibrium, the slope of the isoquant equals the
slope of the isocost.
Fig. M-3
4.
(a) Q TFC ($) TVC ($) TC ($) AFC ($) AVC ($) AC ($) MC ($)
0 12 0 12 — — — —
1 12 6 18 12 6 18 6
2 12 8 20 6 4 10 2
3 12 9 21 4 3 7 1
4 12 10 22 3 2.50 5.50 1
5 12 14 26 2.40 2.80 5.20 4
6 12 21 23 2 3.50 5.50 7