Are the following statements are true, false or uncertain? Explain why. a) The p

Question

Are the following statements are true, false or uncertain? Explain why.

a) The production function of Bethlehem Steel might exhibit constant or increasing returns to scale, yet the resulting cost curve could have the normal shape f the supply of iron ore facing the firm were inelastic instead of perfectly elastic.

b) For the cost function C= q0.8v0.4w0.6:

The function exhibits decreasing average cost.

The function is homogeneous of degree 1 in v and w.

The elasticity of marginal cost with respect to v exceeds the elasticity with respect to w.

c) Technical progress will shift a firm's production function and cause more capital (and less labor) to be hired.

d) For a constant returns to scale production function, marginal costs are constant but the average cost curve has an U-shape.

e) A firm's economic profits are given by total revenue minus the cost of capital.

Explanation / Answer

a) True. With the increase in production Bethlehem purchases more of ore which would increase the price of the inputs. This rise in price could offset the benefits realized from increasing returns leading to reduced inputs per unit of output

b) The function exhibits decreasing average cost - False

The function is homogeneous of degree 1 in v and w - True

The elasticity of marginal cost with respect to v exceeds the elasticity with respect to w - False

c) True. With the increase in technical advancement the investment on machineries increases which increases capital investment and reduces the labor being hired which eventually increases productivity

d) True. Because MC will be constant for a constant return to scale production function and the average cost curve has a U-shape

e) False - Economic profit = Total Revenue - Total Cost

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