FINANCE-Suppose a firm with a production function Q = KL

QUESTION

Suppose a firm with a production function Q = KL (where MPL = K and MPK = L) is producing 125 units of output by using 5 workers and 25 units of capital. The wage rate (W) per worker is $10 and the rental rate per unit of capital (R) is $2. What happens to the firm’s long-run average total cost if it decreases output to 45 units?A.Long-run average total cost falls from $1.80 at 125 units of output to $1.15 at 45 units of output.B.Long-run average total cost falls from $0.80 at 125 units of output to $0.60 at 45 units of output.C.Long-run average total cost rises from $1.80 at 125 units of output to $2 at 45 units of output.D.Long-run average total cost rises from $0.80 at 125 units of output to $1.33 at 45 units of output.

ANSWER:

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