What is the least-cost combination of labour and capital

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1. What would the consumers' and producers' tax incidences be equal to if the government imposed an excise tax when:

(a) demand was perfectly elastic

(b) demand was perfectly inelastic

(c) supply was perfectly elastic

(d) supply was perfectly inelastic?

Draw graphs to support your arguments.

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2. Indicate how each of the following-(a) to (e) on the next page-would shift the (i) marginal- cost curve, (ii) average-variable cost curve, (iii) average-fixed-cost curve, and (iv) average- total-cost curve of a manufacturing firm. In each case specify the direction of the shift.

TOTAL PRODUCT TOTAL FIXED COST  TOTAL VARIABLE COST   TOTAL COST  AVEREGE FIXED COST   AVEREGE VARIABLE COST  AVEREGE TOTAL COST   MARGINAL COST 
0 0





1 45





2 85





3 120





4 150





5 185





6 225





7 270





8 325





9 390





10 465





(a) A reduction in business property taxes

(b) An increase in the nominal wages of production workers

(c) A decrease in the price of electricity

(d) An increase in insurance rates on plant and equipment

(e) An increase in transportation costs.

3. Suppose the productivity of labour and capital are as shown in the table at the top of the next page. The output of these resources sells in a purely competitive market for $1 per unit. Both labour and capital are hired under purely competitive conditions at $1 and $3 respectively.

(a) What is the least-cost combination of labour and capital to employ in producing 80 units of output? Explain .

(b) What is the profit-maximising combination of labour and capital for the firm to employ? Explain. What is the resulting level of output?

(c) When the firm employs the profit-maximising combination of labour and capital as determined in (b), is this combination also the least costly way of producing the profit-maximising output? Explain.

Units of labour Total product Marginal physical product Product price Total revenue Marginal Revenue product
1 17
2

2 31
2

3 43
2

4 53
2

5 60
2

6 65
2

Units of capital MP of capital Units of labour MP of labour
1 24 1 11
2 21 2 9
3 18 3 8
4 15 4 7
5 9 5 6
6 6 6 4
7 3 7 1

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Reference no: EM13849973

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