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Relationships between production and cost

1) Discuss on relationships between production and cost, highlighting the equivalence between diminishing marginal productivity and increasing marginal costs. Given a table of data representing a short-run production function (levels of the variable input and the associated total product), compute marginal and average products and determine the input level where diminishing returns begins.

2) Discuss on the relationships among total, average, and marginal costs. Using the same data from the previous(#1,as above) exercise and a wage rate specified by the instructor, compute the marginal cost curve based on the marginal products.

Solution Preview

1) Marginal productivity is the additional output obtained from increasing an input. The attached spreadsheet shows the effect of increasing the number of workers (L) at a firm where labor is the only input. The production function is given by column C, Total Production (TP). You can use different production data by changing the contents of column C.
At first the Marginal Product ...

Solution Summary

The mathematical relationships between production and cost, specifically the equivalence between diminishing marginal productivity and increasing marginal costs. Illustrated with a spreadsheet and graph.

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