1. Assume that both capital and labor exhibit diminishing returns. Suppose you c

Question

1. Assume that both capital and labor exhibit diminishing returns. Suppose you can hire an additional unit of labor for $20, and he can produce 100 units. You could also buy an additional machine at the cost of $200, and that machine would allow you to produce an additional 1200 units.
If your main concern is minimizing average cost, what should you do?
a) Hire the worker (unit of labor)
b) There is not enough information to say.
c) Buy the machine
d) Do nothing, you are already minimizing cost

2. You are in month 6 of a 12 month lease. When calculating your profit this month, your rent expense is considered (hint: the answer is the same for accounting and economic profits...)
a) sunk
b) variable

c) marginal
d) fixed

Explanation / Answer

1> c) Buy the machine

Reason

If I buy the machine, it gives a return of 1200/200 units = 6 units for a dollar.

If I use labor, it gives a return of 100/20=5 units for a dollar.

2> a) sunk

It is a sunk cost because it is not recoverable possibly.

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