1. If there are diminishing returns to the variable input, will average variable cost necessarily increase with increase in output? Explain.
2. Ms. Hunt and Ms. Peck agree to type a manuscript for professor Paul Q=H1/4 P3/4 The production function for the manuscript is given to be where Q = number of type written pages, H= the number of hours Hunt spends typing, P = the number of hours Peck spends typing. Hunt and Peck receive $4 and $12 per hour, respectively.
a. If professor Paul decides to minimise the cost of production, how much of Ms. Peck ‘s labour will be used to produce a 300-page manuscript?
b. What will be the marginal cost of the 227th page? Will this be greater than, equal to, or less than the average cost of the 227th page?
3. Explain how it is possible for an industry to be a constant-cost industry even though each firm in the industry has increasing marginal costs.