of the worker's next best option.it is possible that the worker might have been able to geta better job that utilizes his skills more efficiently Alternatively,the worker could have been doing unpaid work,such as care of a child or elderly person at home,which would have had a value to those receiving the service. 4.Suppose that labor is the only variable input to the production process.If the marginal cost of production is diminishing as more units of output are produced,what can you say about the marginal product of labor? The marginal product of labor must be increasing.The marginal cost of production m the extr of producing one m unit of o put. cost is diminishing,then it must be taking fewer units of labor to produce the extra unit of output.since the extra cost refers to the extra cost of the labor.If fewer units of labor are required to produce a unit of output,then the marginal product extra output produced by an extra unit of labor)must be increasing.Note also that MC-w/MPL,so that if MC is diminishing then MPL must be sing for any given w. 5.Suppose a chair manufacturer finds that the marginal rate of technical substitution of capital for labor in his production process is substantially greater than the ratio of the rental rate on machinery to the wage rate for assembly-line labor.How should he alter his use of capital and labor to minimize the cost of production? To minimize c t the manufacturer should use a combination of capital and labor so the rate at which he can trade capital for labor in his production proces is the same as the rate at which he can trade capital for labor in external markets. The manufacturer would be better off if he increased his use ofcapital and decreased his use of labor,decreasing the marginal rate of technical substitution,MRTS.He should continue this substitution until his MRTSequals the ratio of the rental rate to the wage rate. The MRTS in this s equal to MPK/MPL manufacturer uses more K and less L,the MPK will diminish and the MPL will increase,both of which will decrease the MRTS until it is equal to the ratio of the input prices(rental rate on capital divided by wage rate). 6.Why are isocost lines straight lines? The isocost line represents all possible combinations of labor and capital that a g total osThe pe of are I fixed,t hen the ratioof prices is clearly fixed and the isocost line is straight.Only when the ratio or factor prices change as the quantities of inputs change is the isocost line not straight. 7.Assume the marginal cost of production is increasing.Can you determine whether the average variable cost is increasing or decreasing?Explain. Marginal cost can be increasing while average variable cost is either increasing or decreasing.If marginal cost is less (greater)than average variable cost,then each additional unit is adding s(more)to total cost than previous units added toof the worker’s next best option, it is possible that the worker might have been able to get a better job that utilizes his skills more efficiently. Alternatively, the worker could have been doing unpaid work, such as care of a child or elderly person at home, which would have had a value to those receiving the service. 4. Suppose that labor is the only variable input to the production process. If the marginal cost of production is diminishing as more unit s of output are produced, what can you say about the marginal product of labor ? The marginal product of labor must be increasing. The marginal cost of production measures the extra cost of producing one more unit of output. If this cost is diminishing, then it must be taking fewer units of labor to produce the extra unit of output, since the extra cost refers to the extra cost of the labor. If fewer units of labor are required to produce a unit of output, then the marginal product (extra output produced by an extra unit of labor) must be increasing. Note also, that MC=w/MPL, so that if MC is diminishing then MPL must be increasing for any given w. 5. Suppose a chair manufacturer finds that the marginal rate of technical substitution of capital for labor in his production process is substantially greater than the ratio of the rental rate on machinery to the wage rate for assembly-line labor. How should he alter his use of capital and labor to minimize the cost of production? To minimize cost, the manufacturer should use a combination of capital and labor so the rate at which he can trade capital for labor in his production process is the same as the rate at which he can trade capital for labor in external markets. The manufacturer would be better off if he increased his use of capital and decreased his use of labor, decreasing the marginal rate of technical substitution, MRTS. He should continue this substitution until his MRTS equals the ratio of the rental rate to the wage rate. The MRTS in this case is equal to MPK/MPL. As the manufacturer uses more K and less L, the MPK will diminish and the MPL will increase, both of which will decrease the MRTS until it is equal to the ratio of the input prices (rental rate on capital divided by wage rate). 6. Why are isocost lines straight lines? The isocost line represents all possible combinations of labor and capital that may be purchased for a given total cost. The slope of the isocost line is the ratio of the input prices of labor and capital. If input prices are fixed, then the ratio of these prices is clearly fixed and the isocost line is straight. Only when the ratio or factor prices change as the quantities of inputs change is the isocost line not straight. 7. Assume the marginal cost of production is increasing. Can you determine whether the average variable cost is increasing or decreasing? Explain. Marginal cost can be increasing while average variable cost is either increasing or decreasing. If marginal cost is less (greater) than average variable cost, then each additional unit is adding less (more) to total cost than previous units added to