Explain difference between diminishing and decreasing scale


Assignment:

1. Joe runs a farm.  He rents the land for $100 a day, and he can hire workers for $20 per day for each worker.  His short run production function is given in the first two columns of the following table.

Workers

Output

MP

TVC

TFC

TC

AFC

AVC

ATC

MC

0

0

-------

0

 

 

-------

--------

-------

-----

1

10

 

 

 

 

 

 

 

 

2

25

 

 

 

 

 

 

 

 

3

45

 

 

 

 

 

 

 

 

4

60

 

 

 

 

 

 

 

 

5

70

 

 

 

 

 

 

 

 

6

74

 

 

 

 

 

 

 

 

a) Complete the table above.

b) Carefully graph AVC, ATC, and MC.  Your graph should have cost (measured in dollars) on the vertical axis, and output on the horizontal axis.

c) With which worker does diminishing marginal returns set in?

2. Carefully explain the difference between diminishing marginal returns and decreasing returns to scale.

3. Suppose a competitive firm can sell its output for $5 per unit.  The following table gives the firm's short run production function.

Labor

Output

0

0

1

60

2

130

3

180

4

220

5

250

6

260

In the table below, you will determine several points on the firm's demand curve for labor.  To do this, you must determine how many workers the firm should hire for different values of the wage rate in order to maximize profit.  Complete the table below:

Wage Rate Per Worker

Quantity Demanded of Workers

$45

 

$75

 

$225

 

$270

 

$320

 

$340

 

4. What are the factors that can lead to a change in demand for labor (shifting of the labor demand curve?) Describe how labor demand would change in response to a change in each factor separately.

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Microeconomics: Explain difference between diminishing and decreasing scale
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