Question

The table above shows the production and cost schedule for producing t-shirts. Each worker is paid $250 per day and the total fixed cost of capital is $1000. T-shirts can be sold at a local store for $15.

Workers	Quantity of Production	Fixed Cost	Variable Cost	Total Cost	Average Fixed Cost	Average Variable Cost	Average	Marginal Cost
							Total Cost
0	0
1	20
2	60
3	140
4	200
5	240
6	260
7	268
8	272

1. Use this information to complete the table. How many workers should the firm hire to maximize the firm’s profits?
2. How many t-shirts will be produced at maximum profits?
3. Suppose the price of t-shirts falls to $5. Explain how many t-shirts would be supplied in the short-run.
4. Explain how many t-shirts would be supplied in the long-run.
5. Suppose that prices return to $15 and the workers take this is a sign to negotiate a pay rise to $350 per day. What will be the profit-maximising quantity of t-shirts if their negotiations are successful?
6. Explain which of the cost curves will move and which will stay the same.

Answer 1

Formulas used in calculation

VC = Wages*no of labor employed

TR = Price*Quantity

MR = (TRn-TRn-1)/(Qn-Qn-1)

MC = (TCn-TCn-1)/(Qn-Qn-1)

TC = Fixed Costs + Variable Costs

AFC = FC/Q, AVC = VC/Q, ATC = TC/Q

Profits =TR-TC and profit max quantity is taken where MR=MC or MR is just greater than MC.