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Assume a firm is producing 1000 units of a good by using two inputs, capital and labor, whose per unit prices are $50 and $20. Assume also that the marginal physical product of the last unit of capital is 25 and the marginal physical product of the last unit of labor is 15. In order to minimize its costs of production, the firm should adjust its combination of inputs by employing more labor and less capital.
91) Economists describe short-run decisions as "constrained" decisions, while long-run decisions are described as "planning" decisions. Referring to a firm's short-run average cost function and long-run average cost function, explain this distinction.
92) What are the two primary factors that influence a firm manager's choice between a labor-intensive and a capital-intensive method of production? How does each factor influence the manager's choice.
93) Explain why X-inefficiency is likely to be more prevalent in an industry in which firms have market power.
94) Explain how labor resistance and political and legislative influences reduce the ability of firms to minimize their costs of production. What do the two have in common in this regard?
95) Historically, empirical evidence showed that it was more cost effective to have a single generator of electricity serve a particular region's electricity needs than to have several smaller units compete against each other. More recently, technological advances have occurred in the generation of electricity that allow much smaller generating units to produce electricity for the same average cost as much larger units. Explain how this change would be reflected in the firm's long-run average cost curve and minimum efficient scale.
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