Question

Suppose you are given the following partially complete table for the coming month. You ​have a meeting with the chief financial officer in fifteen minutes and he is expecting this completed ​information. Note: Labor units are evenly and equally paid. The only varible input is labor.

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Labor Q Fixed Cost Variable Cost Total Cost

_________________________________________________________________

0 0 ______ $0 ______

1 5,500 ______ ______ ______

2 8,500 ______ ______ ______

3 9,000 ______ ______ ______

4 9,200 ______ $1,000 ______

5 9,000 ______ ______ $11,250

a) Suppose the marginal resource (or factor) cost for the month increases from its current level ​in part a) to $300 per worker. Given the numbers in part a), if the market price for this ​output is $0.50 per unit, where would the company stop hiring workers? Show work.

b) What would be the average variable cost when hiring two workers (assume the original ​numbers from part a)? If the market price is ​$0.50 per unit, should this firm remain in ​business or shut down in the short-run? How do you know?

Answer 1

Labor, L	Q	Fixed Cost, FC	Variable Cost= TVC=wage*L	Total Cost= TC=FC+TVC
0	0	10000	0	10000
1	5500	10000	250	10250
2	8500	10000	500	10500
3	9000	10000	750	10750
4	9200	10000	1000	11000
5	9000	10000	1250	11250

Refer to given data for number of labor=4,

Variable cost per unit of labor=1000/4=$250

Refer to given data for number of labor=5

Fixed Cost=Total Cost-Total variable cost=11250-5*250=$10000

a)

Suppose wage rate is changed to $300

Labor, L	Q	Marginal Product, MP=Change in Q/Change in L	Marginal Revenue Product, MRPL= Price*MP
0	0
1	5500	5500	2750
2	8500	3000	1500
3	9000	500	250
4	9200	200	100
5	9000	-200	-100

Firm will increase the number of labor as long as MRPL is higher than or equal to wage rate. We observe that MRPL is higher than $300 if there are 2 labors and MRPL is less than $300 if there are 3 labors. So, firm will hire 2 labors. Firm will stop after hiring 2 labors.

b)

If there are 2 labors,

TVC=number of labors*wage rate=2*300=$600

Total output=Q=8500

AVC=TVC/Q=600/8500=0.07

We observe that AVC is less than price. It means that firm is operating above shut down point. It means that the firm should continue to produce in the short run.