Question

Production Function:  

Labor (L)	1	3	6	10	15
Total Product (Q)	1	2	3	4	5

1. Using the data in the table above, compute the marginal product using the definition given earlier in this module. Draw a graph of the marginal product curve using the numbers you computed. Suppose this firm can hire workers at a wage rate of $10 per hour to work in its factory which has a rental cost of $100. Use the data in the table above to calculate the costs (i.e., a data table showing costs at various levels of production) in the following steps:

2. First compute the variable cost for Q = 0 through Q = 5.

3. Next compute the fixed cost for Q = 0 through Q = 5.

4. Then compute the total cost for Q = 0 through Q = 5. This is the cost function.

5. Finally compute the marginal cost for Q = 0 through Q = 5. Draw the marginal cost curve and compare it to the marginal product curve above. Explain what you see.

Answer 1

Answer: We are given Total Product=Q and Labour=L, Labour is input.

Lets take Marginal Product=MC,Variable Cost=VC,Fixed Cost =FC,Total Cost=TC and Marginal Cost = MC.

Refer to the table.

Note:For Simplification we assume each labour is working for one hour only. This will make calculating Variable Cost easier, as the wages are calulated in hours.

Analysis:

(i) The MP curve is downward sloping whereas MC Curve is upward sloping.

(ii) The slope of MC curve is constant.

(iii) The two curves will never intersect.

(iv) This means more and more labour is needed to produce one more unit of good, this means each additional unit of output cost more than the previous.