Carlton Industries, a manufacturer of electronic equipment, estimates the following relation between its marginal cost of production output:

MC = $150 + 0.005Q

a) What does this MC function imply about the effect of the law of diminishing returns on Carlton's short-run cost function?
b) Derive the marginal cost of production at 1,500, 2,000, and 3,500 units of output.
c) Assume Carlton operates as a price taker in a competitive market. What is this firm's profit-maximizing level of output if the market price is $175 (P = MR = $175)?
d) Present Carlton's short-run supply curve for its electronic equipment (Hint: Recall that a supply curve is of the form: Qs = ?(P )).

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Solution:

a) What does this MC function imply about the effect of the law of diminishing returns on Carlton's short-run cost function?

Law of diminishing returns states that as additional units of variable input are combined with a fixed input, at some point marginal product starts to diminish. Producing one more unit of output costs more and more in variable inputs i.e. as Output increases, marginal cost increases.

Here ...

Solution Summary

Solution describes the applicability of law of diminishing returns with given marginal cost function. It also depicts the procedure to find profit maximizing output level and finally derives firm's short run supply function.

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