1. A typical firm, Generico LLC, uses two inputs: Physical capital, denoted K, and labor, denoted...

 

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1. A typical firm, Generico LLC, uses two inputs: Physical capital, denoted K, and labor, denoted L. Generico's technology converts the inputs into output, q, according to a function q = f(K,L). In the short run the amount of capital Generico has is fixed at K. Generico has short-run cost curves of the typical shape discussed in lecture. a. Draw Generico's short-run marginal cost (MC(q)), average cost (AC(q)), average variable cost (AVC(q)), and average fixed cost (AFC(q)) on one graph, and on a second graph right below, draw the short-run total cost curve (C(q)). Take care to have curves in the first graph intersect with each other in ways that make sense, and to align the top and bottom graphs appropriately [Hint: Before drawing, review figure 7.1 on page 217 of the book]. b. Explain why MC, AC, AVC, and AFC have the shapes that they do, and comment on where MC intersects AC and AVC. Be sure to utilize the properties of the underlying short-run production function in your answer. Also explain why the graph of these curves aligns the way it does with the graph you have drawn below of total cost. c. In the long run, Generico can freely vary both K and L. Suppose Generico's long run AC curve is "u-shaped." What could explain this shape? Explain why the Law of Diminishing Returns is not part of the answer. 1. A typical firm, Generico LLC, uses two inputs: Physical capital, denoted K, and labor, denoted L. Generico's technology converts the inputs into output, q, according to a function q = f(K,L). In the short run the amount of capital Generico has is fixed at K. Generico has short-run cost curves of the typical shape discussed in lecture. a. Draw Generico's short-run marginal cost (MC(q)), average cost (AC(q)), average variable cost (AVC(q)), and average fixed cost (AFC(q)) on one graph, and on a second graph right below, draw the short-run total cost curve (C(q)). Take care to have curves in the first graph intersect with each other in ways that make sense, and to align the top and bottom graphs appropriately [Hint: Before drawing, review figure 7.1 on page 217 of the book]. b. Explain why MC, AC, AVC, and AFC have the shapes that they do, and comment on where MC intersects AC and AVC. Be sure to utilize the properties of the underlying short-run production function in your answer. Also explain why the graph of these curves aligns the way it does with the graph you have drawn below of total cost. c. In the long run, Generico can freely vary both K and L. Suppose Generico's long run AC curve is "u-shaped." What could explain this shape? Explain why the Law of Diminishing Returns is not part of the answer.