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1. Consider a firm's short-run production possibilities. Let q = 13%, r and w denote, respectively the production function, the prices of K (capital) and
1. Consider a firm's short-run production possibilities. Let q = 13%, r and w denote, respectively the production function, the prices of K (capital) and L (iabor). Suppose i? = 100 (fixed) and 1. is variable. a. b. c. Write down the expression for the shortrun production function. What is the xed cost (FC), variable cost (Vt), average cost (AC) and, marginal cost (MC)? Let q* denote the level of output where average costs are the lowest level possible and minimized. Show that MC(q*) = AC(q*}. And, when MC(q) 4: Actq), average costs fall as q increases; and, when MClq) > AC(q}, average costs increase as q increase. Provide some intuition for this result. Using the case in parts a and h of this problem, calculate q*(r,w, i? = 100). Illustrate this in a gure where q is on the horizontal axis and Actq) and MClq) are on the vertical axis. Compute the marginal product of labor. In a sentence or two, provide some intuition for why MC =
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