Suppose the output (q) produced by different amounts of labour (L) hired by a firm is given below:

Suppose the output (q) produced by different amounts of labour (L) hired by a firm is given below:

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(a) Calculate the marginal and average product labour levels from 1 to 6 (show your full calculations for L = 4). Graph the marginal and average products of labour. {Hint: Marginal numbers are often plotted halfway between levels since they apply to the move between these two levels (they are not a measurement at a level). This proves somewhat complicated later on, so just graph the marginal number at the “end” level, eg. plot MP for the first unit of labour at L = 1 instead of L = ½.)

(b) Assume the firm has fixed costs equal to $300 and that each unit of labour costs $150. For each of the 7 possible output levels calculate fixed cost (FC), variable cost (VC), and total cost (TC). Show your full calculations for the output level q =120. Graph the FC, VC, and TC curves.

(c) At each of the possible (positive) output levels calculate average variable cost (AVC), average total cost (ATC), and marginal cost (MC). Show your full calculations for the output level q =120. In a new diagram, graph these values. [Hints: (i) If X additional units cost Y additional dollars, then the appropriate MC number is Y/X. (ii) Graph MC numbers at the “end” output level.]

(d) Suppose this firm operates in a perfectly competitive market. How many units will the firm produce when the market price is: (i) $3.75, (ii) $5.00, (iii) $7.50, (iv) $15.00, per unit of output? [4] Over for parts (e) and (f)…… (e) Suppose there are 50 identical firms operating in this market and that market demand schedule is given by:

What are the short-run equilibrium price and quantity in the market? Is this a long-run equilibrium situation? Explain.

(f) Assume that the short-run cost curves are drawn for the long-run efficient plant size. What are the long-run equilibrium price and quantity in the market? What is the long-run equilibrium number of firms in the industry? Explain.

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