02 Jun Please indicate whether the claim is true or false (3 marks
Question
Please indicate whether the claim is true or false (3 marks). You must provide support/rationale for your answer for full credit.
a) A firm’s production function can be characterized by the equation Q=16L+2K. Claim: This firm’s production technology exhibits diminishing marginal rate of technical substitution (L for K).
b) A firm’s fixed proportion production function can be described by the equation Q=min(L,K). Claim: The firm’s optimal mix of inputs will be inversely proportional to the input prices.
c) Suppose a firm requires 20 units of labour and 10 units of capital to produce 1000 units of output. The same firm requires 40 units of labour and 25 units of capital to produce 2000 units of output. Claim: This indicates managerial diseconomies of scale for this firm at these output levels.
d) Consider a firm whose average variable cost is greater than the price of its output in the short run. Claim: This firm may operate in the short run in order to recoup some of its non-sunk fixed costs.
e) Consider a market where demand is given by Q=21-P and supply is given by Q=2P. Claim: If there is a price ceiling of $5, consumer surplus will be at least $50.
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