Question

The Marginal Principle states, “Increase the level of activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost.” The Widget Factory makes and sells widgets in a perfectly competitive market, operating in the short term. Fixed cost per widget is $4 Labor costs is $23 per worker (Variable cost per worker) Widgets sell for $13 each (Revenue price per unit) Workers 10 11 12 13 14 15 16 17 Output 6 30 41 46 50 53 55 56 Suggestion:

It is helpful to first put your data into a table, and then create the graph. Refer to chapters 5 and 6 for examples of tables and for the MC, MR and ATC formulas. Using the data from above:. Graph the Marginal Cost (MC), the Marginal Revenue (MR), and the Average Total Cost (ATC). What level of output will the firm select, and how many employees will be hired? What is the economic profit at this level of output, and what is the economic profit at output levels slightly above and slightly below this level?

Repeat #1, but alter your data by increasing labor costs to $28 (due to higher wage rate, higher costs of benefits, etc.). Graph the Marginal Cost (MC), the Marginal Revenue (MR), and the Average Total Cost (ATC). What level of output will the firm select, and how many employees will be hired? What is the economic profit at this level of output, and what is the economic profit at output levels slightly above and slightly below this level?

Repeat #1, but alter your data by increasing fixed costs to $6 (due to higher rent, energy, taxes, material costs, etc.) Graph the Marginal Cost (MC), the Marginal Revenue (MR), and the Average Total Cost (ATC). What level of output will the firm select, and how many employees will be hired? What is the economic profit at this level of output, and what is the economic profit at output levels slightly above and slightly below this level?

Repeat #1, but raise the price of the product to $15. Graph the Marginal Cost (MC), the Marginal Revenue (MR), and the Average Total Cost (ATC). What level of output will the firm select, and how many employees will be hired? What is the economic profit at this level of output, and what is the economic profit at output levels slightly above and slightly below this level?

Repeat #1, but lower the price of the product to $10. Graph the Marginal Cost (MC), the Marginal Revenue (MR), and the Average Total Cost (ATC). What level of output will the firm select, and how many employees will be hired? What is the economic profit at this level of output, and what is the economic profit at output levels slightly above and slightly below this level? State a general observation about the number of employees who will need to be hired in the 1-5 scenarios.

Answer 1

1. In order to determine marginal cost (MC), marginal revenue (MR) and average total cost (ATC), we will need to tabulate the data and calculate fixed costs (FC), variable cost (VC), total cost (TC), and total revenue (TR). Each of the formulas and calculations are explained after the table.

No. of workers	Output Quantity	FC	VC	TC	MC	ATC	TR	MR
10	6	24	230	254	-	42.3	78	-
11	30	120	253	373	4.9	12.4	390	13
12	41	164	276	440	6	10.7	533	13
13	46	184	299	483	8.6	10.5	598	13
14	50	200	322	522	9.75	10.4	650	13
15	53	212	345	557	11.6	10.5	689	13
16	55	220	368	588	15.5	10.6	715	13
17	56	224	391	615	27	10.9	728	13

FC is given to be $4 per widget. In the above table, FC column is calculated by multiplying $4 with the output quantity. VC is given to be $23 per worker. In the above table, VC column is calculated by multiplying $23 with the number of workers employed. TC is a sum of FC and VC. MC is calculated by dividing change in total cost by change in quantity. For instance, MC for 30 units =

(373-254) / (30-6) = $4.9

ATC is calculated by dividing total cost of production by quantity of units produced. For instance, ATC of 6 units = 254 / 6 = $42.3.

TR is calculated by multiplying number of units produced by price per unit, which is $13. MR is given to be $13.

Plotting these on the graph, we get -

The firm will continue to increase its output as long as MR is greater than MC. Given the data, MR is greater than MC till 53 units of production. After this, MC increases above MR of $13. At this level, 15 workers will be employed.

Economic profit is calculated as TR - TC. At this level, profit = 689 - 557 = $132.

Profit slightly below, that is at 50 units = 650 - 522 = $128.

Profit slightly above, that is at 55 units = 715 - 588 = $127.

2. Increased labor cost of $28 means that our VC now has increased to $28 per worker, instead of the earlier $23. The following changes will happen in the table -

No. of workers	Output Quantity	FC	VC	TC	MC	ATC	TR	MR
10	6	24	280	304	-	50.6	78	-
11	30	120	308	428	5.1	14.2	390	13
12	41	164	336	500	6.5	12.1	533	13
13	46	184	364	548	9.6	9.7	598	13
14	50	200	392	592	11	11.8	650	13
15	53	212	420	632	13.3	11.9	689	13
16	55	220	448	668	18	12.1	715	13
17	56	224	476	700	32	12.5	728	13

Plotting these on the graph, we get -

The firm will continue to increase its output as long as MR is greater than MC. Given the data, MR is greater than MC till 50 units of production. After this, MC increases above MR of $13. At this level, 14 workers will be employed.

Economic profit is calculated as TR - TC. At this level, profit = 650 - 592 = $58.

Profit slightly below, that is at 46 units = 598 - 548 = $50.

Profit slightly above, that is at 53 units = 689 - 632 = $57.