1.The four questions refer to the following table in which columns 1, 2, and 3 give the economically efficient combinations of labor and capital for various output levels. The price of capital is $50,

1.

The four questions refer to the following table in which columns 1, 2, and 3 give the economically efficient combinations of labor and capital for various output levels. The price of capital is $50, and the price of labor is $30.

(1)

Output

(2)

Capital

(3)

Labor

(4)

Long-Run

Total Cost

(5)

Long-Run

Average Cost

(6)

Long-Run

Marginal Cost

20

8

12

______

______

______

40

15

20

______

______

______

60

25

35

______

______

______

80

40

50

______

______

______

Using the above table, answer the following questions.

• Economies of scale exist through ______ units of output because _________ is  ____________.
• At 20 units of output LTC = $_________ and LAC = $______.  Between zero and 20 units LMC = $______.
• At 40 units of output LTC = $______ and LAC = $______.  Between 20 and 40 units LMC = $______.
• Diseconomies of scale exist beyond ______ units of output because _________ is _________.

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2.

Grocery stores and gasoline stations in a large city would appear to be examples of competitive markets: There are numerous relatively small sellers, each seller is a pricetaker, and the products are quite similar.

• How could we argue that these markets are not competitive?
• Could each firm face a demand curve that is not perfectly elastic?
• How profitable do you expect grocery stores and gasoline stations to be in the long run?

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3.

Airline industry experts generally believe that because of the "highly competitive" nature of U.S. airline markets, it is usually impossible to pass on higher jet fuel prices to passengers by raising ticket prices.

• What factors do you suppose contribute to making U.S. airline markets "highly competitive"?
• Accepting the premise that U.S. airline markets are indeed highly competitive, analyze in both the short run and long run the difficulty of raising ticket prices when jet fuel prices rise.