Suppose that production for good X is characterized by the following production function,Q = K^0.5L^0.5,where K is the fixed input in the short run.If the per-unit rental rate of capital,r,is $25 and the per-unit wage,w,is $15,then the average variable cost of using 81 units of capital and 9 units of labor is: A) $5. B) $75. C) $80. D) There is insufficient information to determine the average variable costs.

Question

Quizplus · Accepted Answer

The average variable cost (AVC) is calculated as the total variable cost (TVC) divided by the quantity of output (Q). Here, TVC is the cost of labor, which is 9 units of labor at $15 each, totaling $135. The output Q is calculated using the production function: Q = 81^0.5 * 9^0.5 = 27. Therefore, AVC = $135 / 27 = $5.

Suppose That Production for Good X Is Characterized by the Following