Question

The assistant to the CFO brings to you a printout of the following:     

            Labor               Q                     Fixed Cost      Variable Cost              Total Cost                  

            =========================================================   

            0                      0                      ______                        $0                    ______           

            1                      15,000             ______                        ______            ______

            2                      45,000             ______                        ______            ______

            3                      92,500             ______                        ______            ______

            4                      145,000           ______                        $1,000             ______

            5                      195,000           ______                        ______            $150,000

            You notice the incompleteness of the table and ask him what it is.

            “It’s last week’s production and cost data,” he responds.

            “It’s not all here,” you reply.

            He’s worried. “I know! The computer froze up on me and this is all it printed out. The CEO said he needed last week’s production and cost data for a meeting in ten minutes! I           don’t know what to do!”

            “Ok,” you respond. “Try and relax.” You study the table for a moment. “Do we pay all of our workers the same wage per week?” you ask.  

            He nods. “Yes! That much I know. Can you help me?”

a) Each blank is worth 1 point.

b) After handing him the completed table, the assistant also says

“The boss wants to know about diminishing returns? What are those? He also wants to know if we encountered them last week and at which worker they started. Can you help me?”

c) The assistant is starting to relax now. His meeting with the CEO is in two minutes. He sheepishly asks you one last question. “Thanks for all your help. But he also wants to know something called average total cost from when three workers are hired. Can you help me?”

Answer 1

Here,Total variable cost at 4 units of labour is 1000.So wage paid per unit worker must be 1000/4=250(since they are paid equal wages)

At 5 units of labour total variable cost will be 5*250=1250

At the same level total cost is 150000 and we know that total cost=variable cost+fixed cost

so fixed cost must be 150000-1250=148750

fixed cost is equal irrespective of amount of labour and quantity.

LABOUR	QUANTITY	FIXED COST	VARIABLE COST	TOTAL COST
0	0	148750	0	148750
1	15000	148750	250	149000
2	45000	148750	500	149250
3	92500	148750	750	149500
4	145000	148750	1000	149750
5	195000	148750	1250	150000

B)Returns are the amount by which product increases when you employ additional amount of labour

return from labour one was 15000

return from labour two was 45000-1500=30000

return from labour three was 92500-45000=47500

return from labour four was 145000-92500=52500

return from labour five was 195000-145000=50000

here we can see that returns increased till labour four but it increased when we employed labour five.So,diminishing returns started from labour five.

C)Average total cost can be defined as total cost divided by output.

so average total cost when three labour were employed was 149500/92500=1.616

PLEASE PROVIDE ME THE FEEDBACK.IT IS AS ENCOURAGING TO ME AS YOUR TEACHER'S COMPLIMENT ISTO YOU.