dkishore1

A firm should continue adding to its capital until the marginal revenue product of capital is:

A) equal to the marginal revenue product of labor.

B) equal to the cost of capital.

C) greater than the cost of capital.

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A firm should continue to accept capital projects until the marginal revenue product of capital (the value added) is equal to the cost of capital. Prior to this point, the firm gains from each unit of capital added.

dkishore1

Which of the following conditions is most likely to exist for a typical production process when average product is at its maximum?

A) Average variable cost is at a minimum.

B) Marginal product is increasing.

C) Marginal cost is at a minimum.

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When average product is at a maximum, average variable cost is at a minimum. At the corresponding labor and output level, marginal product is decreasing and marginal cost is increasing.

dkishore1

Which of the following most accurately describes the relationship between marginal cost (MC), average variable cost (AVC), marginal product (MP), and average product (AP)?

A) When MP > AP, MC > AVC.

B) When MP = AP, MC = AVC.

C) When MP = AP, MC > AVC.

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At some output level Q and corresponding labor input L, MC = AVC and MP = AP. At Q and L, AVC is at its minimum and AP is at its maximum. Hint: draw the curves.