Question
In: Economics
Andi recently opened a car wash business on Jalan Margonda Raya, Depok. Andi only uses two...
Andi recently opened a car wash business on Jalan Margonda Raya, Depok. Andi only uses two types of input, namely labor and equipment (automatic car washer). Labor costs and machine costs are IDR 120,000.00/day and IDR 200,000.00/day respectively. The following is information on the number of workers and cars (output) washed per day at Andi's workshop:
|
Number of Labor |
Number of Machines |
Output |
Marginal Product of Labor |
Labor Costs (IDR) |
Machine Cost (IDR) |
Total Cost (IDR) |
|
1 |
2 |
5 |
||||
|
2 |
2 |
10 |
||||
|
3 |
2 |
20 |
||||
|
4 |
2 |
35 |
||||
|
5 |
2 |
55 |
||||
|
6 |
2 |
70 |
||||
|
7 |
2 |
80 |
Answer the questions below.
a. Complete the table above!
b. Also calculate the productivity per worker. What is your conclusion? Explain!
c. When does Ali's workshop experience a diminishing marginal product of labor? Explain!
d. Based on the information from the table above (and some additional information), draw the following curves:
i. Total Product, Marginal Product of Labor, Average Product of Labor (in one chart). Explain the relationship between curves!
ii. Average variable costs, Average fixed costs, Marginal costs and Average total costs (in one graph). Explain the relationship between curves!
e. Explain the relationship between the curves in points d (i) and (ii) above!
f. Does Andi's workshop experience economies of scale or diseconomies of
scale? Explain what these two concepts mean!
Solutions
Expert Solution
a)
| Labor | Machines | Output | Marginal product of labor | Average Product of labor | Labor cost | Machine Total Cost | Total cost |
| 1 | 2 | 5 | 5 | 5.00 | 120,000 | 200,000 | 320,000 |
| 2 | 2 | 10 | 5 | 5.00 | 240,000 | 200,000 | 440,000 |
| 3 | 2 | 20 | 10 | 6.67 | 360,000 | 200,000 | 560,000 |
| 4 | 2 | 35 | 15 | 8.75 | 480,000 | 200,000 | 680,000 |
| 5 | 2 | 55 | 20 | 11.00 | 600,000 | 200,000 | 800,000 |
| 6 | 2 | 70 | 15 | 11.67 | 720,000 | 200,000 | 920,000 |
| 7 | 2 | 80 | 10 | 11.43 | 840,000 | 200,000 | 1,040,000 |
b) Productivity per worker (Output / Labor) is nothing but average product of labor which is calculated in the table below which shows that average product of labor is rising till output level of 7.
c) Diminishing marginal returns of labor start from output level of 5 because marginal product of labor start falling after that level of output.
d)
| Total Output | Total cost | Average variable cost | Average fixed cost | Marginal cost | Average total cost |
| 5 | 320,000 | 24,000.00 | 40,000.00 | 64,000.00 | |
| 10 | 440,000 | 24,000.00 | 20,000.00 | 120,000.00 | 44,000.00 |
| 20 | 560,000 | 18,000.00 | 10,000.00 | 120,000.00 | 28,000.00 |
| 35 | 680,000 | 13,714.29 | 5,714.29 | 120,000.00 | 19,428.57 |
| 55 | 800,000 | 10,909.09 | 3,636.36 | 120,000.00 | 14,545.45 |
| 70 | 920,000 | 10,285.71 | 2,857.14 | 120,000.00 | 13,142.86 |
| 80 | 1,040,000 | 10,500.00 | 2,500.00 | 120,000.00 | 13,000.00 |
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