Suppose a firm with a production function Q = KL (where MP_L = K and MP_K = L) is producing 125 units of output by using 5 workers and 25 units of capital. The wage rate (W) per worker is $10 and the rental per unit of capital (R) is $2. If it decreases output to 45 units, long-run average total cost _____ at 125 units of output to _____ at 45 units of output. A) rises from $1.80; $2 B) rises from $0.80; $1.33 C) falls from $0.80; $0.60 D) falls from $1.80; $1.15

Question

Quizplus · Accepted Answer

The long-run average total cost increases as output decreases from 125 to 45 units, indicating diminishing returns to scale. The specific numbers provided in the choices are illustrative of the principle that costs per unit increase as output decreases, reflecting less efficient use of inputs.

Suppose a Firm with a Production Function Q = KL