Question

economies of scale Here is the Production Function for working out how it determines the pattern of costs.

Imagine that a Denny’s (Diner) has 10 units of “capital” and the output of breakfasts depends on the number of workers as shown. This is the short run and the fixed capital corresponds to the kitchen and seating area.

Capital (K)	Labor (L)	Output (Q)	MPL	APL		MC		AVC		ATC
10	0	0
10	1	10	10	10
10	2	24	14	12
10	3	39	15	13
10	4	52	13	13
10	5	61	9	12.2
10	6	66	5	11
10	7	66	0	9.4
10	8	64	-2	8

Assume that each unit of labor costs $10 (the wage for a breakfast shift) and that fixed cost is $5.  Also assume that there are no ingredient costs or electricity costs (just to make it ea

sier).

Derive the cost curves:   MC  AVC  and ATC.     Then sketch them (its best to draw and then submit a pdf or jpeg)

Hint: You don’t have enough detail to do MC for each unit of output, so you need to find it for the increments shown in the table (for example MC for the first 10 breakfasts is $10 or $1 per breakfast in that range so put $1 as MC per unit there) So you are finding MC per unit for units in each range based on the info given.  

Fill in columns for MC  AVC and ATC  and graph those cost curves.

Part 2

Show how    AVC and   MC   are flipped mirror images of  AP and MP for the Denny’s Data   

In other words, put the AP and MP diagrams above the cost curves with the labor quantities that correspond to the output quantities lined up to match!!

Answer 1