LEARNING ASSIGNMENT 1 UNIT 3QUESTIONS1. Explain the law of diminishing marginal returns?2. Explain the following terms:a...

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LEARNING ASSIGNMENT 1 UNIT 3

April 14, 2018

LEARNING ASSIGNMENT 1 UNIT 3
QUESTIONS
1. Explain the law of diminishing marginal returns?

2. Explain the following terms:
a. Isoquant
b. Marginal rate of technical substitution
c. Isocost and what is the composition of this equation.

3. How do we determine the optimum level of for two inputs in the long run?

4. How do we determine the optimal level of a single input in the short run?

Graph 1
K
E
D
F
C

Q3
B

Q2

A
Q1

LABOR
Above graph represents isoquants and isocost curves. On the vertical axis we find capital and
on the horizontal axis labor.
1. Which points in Graph 1 represent technical efficiency? What condition is true at these
particular points?
2. If output elasticity is less than 1, what information does it provide to the manager?

Exercise 1
In Graph 2 we see the long run as well as short run expansion path for Maurice & Thomas
Corporation. The price of capital (K) is $60 per unit and the price of labor (L) is $40 per unit. The
manager is operating in the short run with 60 units of capital. Suppose the manager wants to
produce 8,000 units of output.
Graph 2

Show how your computations

K
120

Q1 = 10,000

EXPANSION PATH
LONG RUN

Q3 = 8,000

73.33

60
path (short run)

expansion

40

0

30

50

90

110

180 L
1. In the short run, the cost-minimizing input combination is _________________units of
labor and _______________ units of capital
2. The short run total cost of producing 8,000 units is $
3.

The short run average total cost of producing 8,000 units is

4.

If the manager plans to continue producing 8,000 units in the long run, the manager
could lower the total cost of producing 8,000 units by $______________ by employing
---------------------____________units of labor and
_____________________________units of capital

Exercise 2

The Treasury Office employs certified public accountants (CPAs) to audit corporate tax
returns and bookkeepers to audit individual returns. CPAs are paid $31,200 per year, while
the annual salary of a bookkeeper is $18,200. Given the current staff of CPAs and
bookkeepers, a study made by Petersen and Lewis Professional Consulting showed that
adding one year of a CPA’s time to audit corporate returns results in an additional tax
collection of $52,000. On the contrary, an additional bookkeeper adds $41,600 per year in
additional tax revenue.
1 If the Treasury’s objective is to maximize tax revenues collected, is the present mix of
CPAs and bookkeepers optimal? Explain your answer
2. If the present mix of CPAs and bookkeepers is not optimal, explain what reallocation
should be made.










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