Author Question: Ed's construction company has the following short-run cost function: q3 - 10q2 + 36q. a. What ... (Read 72 times)

kwoodring · **on:** Jul 1, 2018

Ed's construction company has the following short-run cost function: q3 - 10q2 + 36q.

a. What level of output will minimize the average cost? What is the AC at this point?
b. Does the production process indicate diminishing returns? How can you tell?

Question 2

Consider a car dealership that advertises a three-year lease at 250 per month. When you arrive to apply, you discover that the lease requires a down payment of 3600 dollars. You will undertake the lease if

A) you value the lease at least 350 per month.
B) you value the lease at least 250 per month, the 3600 is a sunk cost.
C) you value the lease less than 350 per month.
D) you value buying a new car at 400 per month.

deja · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

a. When dAC/dq=0 or equivalently AC=MC, the AC is at a minimum. To derive:
AC = q2 - 10q + 36
MC = 3q2 - 20q + 36
Setting these equal
2q2 - 10q = 0
Solve to get q=5. Plug back into the AC to get AC = 25 - 50 + 36 = 11
b. The MC curve initially decreases but eventually rises. To see this, look at
dMC/dq = 6q - 20
When q > 10/3, the MC is rising. Since MC = w/MP, this implies the MP is decreasing.

Answer to Question 2

A