Question

The daily production data of a firm are given below. The wage rate is MYR 20 per day for each labor (variable input) and it is the only variable cost incurred. Additionally, output refers to the total products and it is in hundreds of units.

Labor	Output	AP	MP	TVC	TC	MC	AFC	AVC	ATC
0	0	-	-		40	-	-	-	-
1	18
2	37
3	57
4	76
5	94
6	111
7	127

a. Complete these production data. Calculate the average and marginal product per labor, the total variable cost, total cost, marginal cost, average fixed cost, average variable cost and average total cost for each level. Show your calculations.

…………………………………………………………………………………………………..

…………………………………………………………………………………………………..

…………………………………………………………………………………………………..

b. Based on your answer above, evaluate the patterns and relationship between:

1. Total product (TP) and marginal product (MP).

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

2. Average product (AP) and marginal product (MP).

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

3. Marginal product (MP) and marginal cost (MC).

………………………………………………………………………………………

………………………………………………………………………………………

………………………………………………………………………………………

[Total: 25 marks]

Answer 1

Labor	Output (TP)	AP	MP	TVC	TFC	TC	MC	AFC	AVC	AC
0	0	0	0	0	40	40	-	-	-	-
1	18	18	18	20	40	60	1.11	2.22	1.11	3.33
2	37	18.5	19	40	40	80	1.05	2.10	2.10	4.2
3	57	19	20	60	40	100	1	2	3	5
4	76	19	19	80	40	120	1.05	2.10	4.2	6.35
5	94	18.8	18	100	40	140	1.11	2.22	5.55	7.77
6	111	18.5	17	120	40	160	1.17	2.35	7.05	9.41
7	127	18.1	16	140	40	180	20	5.7	20

Average Product (AP) refers to the average output produced by each input (labor). AP= TP/ labor units

Marginal Product (MP) is the change in total product when one more unit of labor is employed. MP= TPn- TPn-1

Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC). TFC is cost associated with fixed inputs and it is present even at zero level of output. TVC is cost associated with variable inputs and varies with inputs. Since when output= 0, TC= 40 then it implies TFC=40 which remains constant throughout. TVC = 20 x labor units.

Marginal Cost (MC) is change in TC when one more unit of output is produced. MC= change in total cost/ change in output.

AFC is fixed cost per unit of output. AFC = TFC/ TP

AVC is variable cost per unit of output. AVC= TVC/ TP

AC is total cost per unit of output. AC = TC/TP

Relationship between (i) Total product (TP) and marginal product (MP):

As Total Product increases, Marginal Product first increases upto third unit of labor and thereafter decreases. That implies that TP increases at increasing rate upto third of labor and then increases at decreasing rate.

Relationship between (ii) Average product (AP) and marginal product (MP):

As long as AP is increasing, MP lies above AP. When AP starts decreasing, MP lies below AP. AP=MP when AP is at its maximum.

Relationship between (iii) Marginal product (MP) and marginal cost (MC):

MP increases and then decreases, that is, it has an inverted U shape. MC decreases and then increases, that is, it has a U shape. MP and MC are water images of each other.