Question

USING THE TABE BELOW,

PART1

1. COMPLETE THE TABLE.
2. PLOT "APP" AND 'MPP" in one diagram.
3. AT WHICH LEVEL OF LABOR DOES "LAW OF DIMINISHING RETURN" START TO APPEAR?
4. AT WHICH. LEVEL OF LABOR DOES MPP CURVE CROSS THE APP CURVE?
5. IN THE BEGINING , AS LABOR INCREASES, DOES APP INCREASE OR DECREASE? BY USING ONE PARAGRAPH, BRIEFLY EXPLAIN WHY.

L Q APP. MPP

0 0 NA NA

1 40. ? ?

2 90 ? ?

3. 150 ? ?

4 200 ? ?

5 240 ? ?

6 270 ? ?

7 290 ? ?

8 300. ? ?

part 2

1.complete the table.'

2.plot ATC, AVC, and MC in one diagram.

3.At which level of output (except Q=1), does MC curve cross the AVC curve?

4.Approximately, at which level of output, does MC curve cross the ATC curve?

5.Does ATC lie above AVC in your diagram, that is, ATC >AVC at each output level? why or why not?

6.Eventually, as output increases, does ATC increase or decrease? By using one paragraph, briefly explain why.

Q TFC TVC TC AFC AVC ATC MC

0 ? ? 30 NA. NA NA. NA

1 ? ? 50 ? ? ? ?

2 ? ? 58 ? ? ? ?

3 ? ? 65 ? ? ? ?

4 ? ? 70 ? ? ? ?

5 ? ? 80 ? ? ? ?

6 ? ? 95 ? ? ? ?

7 ? ? 115 ? ? ? ?

8 ? ? 140 ? ? ? ?

9 ? ? 170 ? ? ? ?

Answer 1

Part 1:

1)

L	Q	APP	MPP
0	0	NA	NA
1	40	40	40
2	90	45	50
3	150	50	60
4	200	50	50
5	240	48	40
6	270	45	30
7	290	41.43	20
8	300	37.5	10

APP = Q/L

MPP = Change in Q / Change in L

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(2)

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(3) Law of diminishing return implies decrease in MPP as L rises.

From 1 to 3 units of labor, MPP increases.

When the number of labor exceeds 3 units, the MPP starts falling.

It means at 3 units of labor law of diminishing return starts.

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(4) MPP curve cross APP curve at 4th unit of labor

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(5) In the beginning, as labor increases, APP increases till the 4th unit of labor (at point MPP cuts APP).

It happens because in short run capital is fixed and only labor can be change, and, from 1 to 4 units of labor fixed factor (i.e., capital) are being utilised effectively. After that because of labor is increasing and capital is fixed, the  productivity of labor decreases. Hence, APP starts falling after 4th unit of labor.

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Part 2:

(1)

Q	TFC	TVC	TC	AFC	AVC	ATC	MC
0	30	0	30
1	30	20	50	30.00	20.00	50.00	20.00
2	30	28	58	15.00	14.00	29.00	8.00
3	30	35	65	10.00	11.67	21.67	7.00
4	30	40	70	7.50	10.00	17.50	5.00
5	30	50	80	6.00	10.00	16.00	10.00
6	30	65	95	5.00	10.83	15.83	15.00
7	30	85	115	4.29	12.14	16.43	20.00
8	30	110	140	3.75	13.75	17.50	25.00
9	30	140	170	3.33	15.56	18.89	30.00

At Q=0, TFC = TC

And, TFC remains same at each level of Q

TVC = TC - TFC

AFC = TFC/Q

AVC=TVC/Q

ATC = TC/Q

MC = (Change in TC/ Change in Q)

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(2)

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(3) MC cross AVC at 5 units of output

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(4) MC cuts ATC approximately around 6 units of output.

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(5) Yes, ATC lies above AVC at each level of output

Because ATC is the sum of AFC and AVC and AFC is posititve at each level of output.

i.e., TC = TVC + TFC

Divide bothe sides by Q

=> (TC/Q) = (TVC/Q) + (TFC/Q)

=> ATC = AVC + AFC

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(6) Eventually as output increases, ATC decreases. Till 6 unit of output, ATC decreases.

It happen because of increasing return to variable input. Increasing return to variable input implies as we increase the amount of variable input and keeping other inputs fixed (like labor is variable input and capital is fixed in short run) then the marginal product of variable input increases.