Question

Below is a table which shows a firm’s cost structure.

Output	Labour	Total cost ($)
0	0	100
2	1	150
5	2	200
9	3	250
15	4	300

(a) Is the firm facing a short-run or long-run condition? Explain.

(b) Does the firm exhibit labour specialisation? Explain.

Answer 1

a) Ans:

Yes, the firm is facing a short-run.

In the short-run production function, there are some fixed factors of production. Fixed cost are available even at zero level of output and remain constant throughout the subsequent level of production. But in the long-run , all the factors of production are variable. In the above scenario , fixed cost are available at zero level of output. So this firm is operating in the short-run.

b) Ans: Yes , the firm exhibits labour specialization.

Specialization of labour leads more productivity in the subsequent level of production. It means marginal product of labor increases and marginal cost of labor decreases in the subsequent or further level of production. Average total cost ( ATC ) decreases due to more productivity.

MP = Change in Total product / Change in number of labour

MC = Change in Total product / Change in Output

ATC = Total Cost / Output

Output	Labour	Total Cost ($)	MC ( $)	ATC ( $)	MP
0	0	100	--	--	--
2	1	150	25	75	2
5	2	200	16.67	40	3
9	3	250	12.50	27.78	4
15	4	300	8.33	20	6