Question 7[10]

7.1.Consider the following short-run production function:

TP =(K,L)

where TP = Total production

K = Capital

L= Labour

7.1.1.With reference to capital and labour, explain how production can be increased in the short run. (1)

7.1.2.Explain the concept of diminishing returns in short-run production.(2)

7.2.Using your knowledge of cost formulas and calculations for a firm producing in the short run, redraw the table below and complete the table by filling in the blank spaces. [Tip: Answers should be rounded off to two decimals.](4)

quantity TFC TVC TC AFC AVC ATC MC

total total total average average average marginal

fixed variable cost fixed variable total cost

cost cost cost cost cost

0 40 0 - 0 0 0 0

1 40 17 57 40 17 57 17

2 40 30 70 20 15 - 13

3 - 41 81 - 13.7 27 11

4 40 48 88 10 12 22 7

5 - 57 97 8 11.4 19.4 9

6 40 71 111 6.67 - 18.5 14

7 40 - 128 5.71 12.57 18.29 17

8 40 112 152 5 14 19 24

9 40 141 181 4.44 15.67 20.11 -

10 40 180 220 4 18 22 39

7.3.Suppose a firm producing coffee provides you with the following information:

Price = R100

Quantity = 150 units of coffee

Cost of production = R9500

7.3.1.Calculate the total revenue of the firm.(1)

7.3.2.Is the firm currently making a profit or a loss? Explain.(2)