Question

In: Economics

In the short run a firm can produce 11 units of output by employing 2 units...

In the short run a firm can produce 11 units of output by employing 2 units (hours) of labour and 15 units of output employing 3 units of labour. Suppose the hourly wage rate is $10. What is the marginal cost of producing the 14th unit of output? Clearly show all steps of your work.

Solutions

Expert Solution

Total cost of producing 11 units = Labor hours × Hourly rate

                                                     = 2 × 10

                                                     = $20

Total cost of producing 15 units = Labor hours × Hourly rate

                                                     = 3 × 10

                                                     = $30

Marginal cost of producing 15th unit = Difference in total cost / Difference in units

                                                            = (30 – 20) / (15 – 11)

                                                            = 10 / 4

                                                            = 2.5

Total cost of producing 14 units = Total cost of producing 15 units - Marginal cost of producing 15th unit

                                                      = 30 – 2.5

                                                      = 27.5

Marginal cost of producing 14th unit = (TC of 14 units – TC of 11 units) / Difference in units

                                                            = (27.5 – 20) / (14 – 11)

                                                            = 7.5 / 3

                                                            = 2.5

Answer: $2.5

Note: TC means total cost.


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