2. In your own words, explain the law of diminishing marginal productivity. Be sure
to mention the reason this law tends to hold in the short run.
4. Discuss the relation between the marginal and average productivity curves and the
marginal and average variable cost curves.
5. What does the elasticity of substitution illustrate? How is it expressed mathemati-
cally? What two factors affect its magnitude?
6. Explain the difference between the explicit and implicit costs of production. Cite
an example of each.
7. Suppose that with 400 patients per year, the SAFC, SATC, and SMC of operating a
physician clinic are $10, $35, and $30 per patient, respectively. Furthermore,
suppose the physician decides to increase the annual patient load by one more
patient. Using short-run cost theory, explain the impact of this additional patient
on the SAVC and SATC. Do they increase or decrease? Why?
10. What does economies of scope mean? Provide an example.
12. You are responsible for hiring one of two hygienists for a dental office. The first
dental hygienist has 25 years of experience. Given her record, he is likely to
satisfactorily service 16 patients per day. Her hourly wage would be approximately
$16 per hour. The other hygienist is new to the industry. He is expected to
satisfactorily service 10 patients per day at an hourly wage of $8. Which dental
hygienist would be the better hire? Why?
14. Draw a U-shaped LATC curve. Then draw the related long-run marginal cost
(LMC) curve, keeping in mind the geometric relation between marginal cost and
average cost (see the discussion on short-run cost curves). What is the relation
between LATC and LMC when increasing returns to scale are present? Between
LATC and LMC when the production process exhibits decreasing returns to scale?
What type of returns to scale holds when LMC equals LATC?
16. Suppose that you are interested in comparing the costs of producing inpatient ser-
vices at Saving Grace Hospital with those at ACME Hospital. Further suppose that
the two hospitals annually admit about 24,000 and 32,000 patients, respectively, at
average STCs per admission of roughly $11,000 and $12,000.
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