If the Cobb-Douglas production function for a beer manufacturer is q=1.52L⁰.⁶K⁰.⁴.If we assume that the firm's capital is fixed at 250 units and the rental rate of capital is $5 per unit,then average fixed cost is

Question

Quizplus · Accepted Answer

Average fixed cost is calculated by dividing total fixed cost by the level of output.

Total fixed cost = (Rental rate of capital) x (Fixed capital)

Total fixed cost = $5 x 250 = $1250

Average fixed cost = Total fixed cost / Output

Average fixed cost = $1250 / q

Substituting the given production function, we get:

Average fixed cost = $1250 / 1.52L⁰.⁶K⁰.⁴

Since we know that the capital is fixed at 250 units, we can simplify the above expression further:

Average fixed cost = $1250 / 1.52L⁰.⁶(250)⁰.⁴

Therefore, the correct answer is B) $1250/q.

If the Cobb-Douglas Production Function for a Beer Manufacturer Is