Question

The firm WidgetsRUs uses a factory which costs $150/day, and Labor which costs $50/day.

It competes in a perfectly competitive market, and the market price, P* = $5.

Fill in the table below:

Number of Workers	Widgets Q	Marginal Product MP	Fixed Cost FC	Variable Cost VC	Total Cost TC	Avg Fixed Cost AFC	Avg Variable Cost AVC	Avg Total Cost ATC	Marginal Cost MC
0	0	-
1	20	20
2	45	15
3	60	15
4	70	10
5	78	8
6	85	7

What is the most efficient scale of the firm? In other words, what is the most efficient quantity a firm this size can produce?

Graph the firm’s marginal cost curve, average variable cost curve and average total cost curve. Show the most efficient scale of the firm on the graph, denoting the efficient level of output Q^e.

Answer 1

Fixed cost, FC = FACTORY COST = $150

Variable cost, VC = WAGE*NUMBER OF WORKERS

Total cost, TC = FC+VC

AFC = FC/Q

AVC=VC/Q

ATC=TC/Q

MC = (TC for Q2 -TC for Q1)/(Q2-Q1)

The efficient quantity will be at where

MP*P = W

FOR 4th worker MP=10, P=5

W=50

MP*P=W

The efficient quantity = 70