Identify the fixed and variable inputs. The firms w x L is fixed through out the production process, so $300 is the fixed cost. Firms, cost of capital r x K is the variable cost. It is variable through out the production process. Gus Bonilla MBA 217 Managerial Economics Individual Assignment b. What are the firm’s fixed costs? Cost of labor is the Firms fixed costs, it is equal to $300 c. What is the variable cost of producing 475 units of output? The variable cost are $75 x 6 = $450 d.
How many units of the variable input should be used to maximize profits? Profit maximization is achieved when MR=MC. Since the firm runs in a competitive market MR=Price= $2. MC=MR, achieved in between 450 and 475 units of out put, and minimum ATC is achieved at 450 units. So, profit maximizing output is at around 450 units e. What are the maximum profits this firm can earn? Profit is maximized at 450 units of output. TR= 900 TC= 675 Profit= TR- Tc = 900- 675 = $225 f. Over what range of the variable input usage do increasing marginal returns exist?
Increasing marginal returns from point 0 units of VC to 3 units. Gus Bonilla MBA 217 Managerial Economics Individual Assignment g. Over what range of the variable input usage do decreasing marginal returns exist? From unit #4 of Variable input (K) onwards there will be decreasing marginal returns h. Over what range of input usage do negative marginal returns exist? From input units 7th onwards there will be negative returns, as the firm incurs losses from this point. Where its ATC is higher than the MR. ) Explain the difference between the law of diminishing marginal returns and the law of diminishing marginal rate of technical substitution? Law of diminishing marginal returns: ?? According to the law of diminishing marginal returns, the margin product will fall if we decide to add more inputs. ?In other words, In a production system, having fixed and variable inputs, keeping the fixed inputs constant, as more of a variable input is added, each additional unit of input yields less and less additional output.
Law of diminishing marginal rate of technical substitution: This law suggests that it takes a large amount of capital to replace a unit of labor when capital use is high but little labor is used. As labor becomes more abundant and capital becomes scarcer, however, less capital is required to replace an additional unit of labor. In other words, the law of diminishing marginal rate of technical substitution indicates that it is relatively difficult to replace additional quantities of an input when the level of that input becomes relatively low.