Question

Ah Ling's Premium Chocolates produces boxes of chocolates for its online business. She rents a small room for RM150 a week in the city centre that serves as her factory. She can hire workers for RM275 a week. There are no implicit costs. Number of Workers Boxes of Chocolates Produced per Week Marginal Product of Labour Cost of Factory Cost of Workers Total Cost of Inputs 0 0 1 330 150 275 425 2 630 3 150 825 975 4 890 5 950 60 1,375 6 10 1,800 (a) Complete the table above. [10 marks] (b) Is Ah Ling operating in the short-run or long-run? Why do you say so? [4 marks] (c) In one of the weeks, Ah Ling earns a profit of RM125. If her revenue for that week is RM1100, how many boxes of chocolate did she produce? [3 marks] (d) If Ah Ling takes a break for a week, would she be earning a profit or suffering a loss? Why?

Answer 1

Solution for the above problem

Ah Lingâ's Premium Chocolates produces boxes of chocolates for its online business. She rents a small room for RM150 a week in the city centre that serves as her factory. She can hire workers for RM275 a week. There are no implicit costs.

So, Cost of factory = RM150 (This is the fixed cost, which remains constant at all levels of output).

Cost of Workers = RM275 * (No. of workers) (This is the variable cost, which changes as the no. of workers hired changes).

Total Cost of Inputs = Cost of Factory + Cost of Workers = RM150 + RM275 * (No. of workers).

Marginal Product of Labor = (Change in boxes of chocolates produced per week)/(Change in no. of workers) = ∆Q/∆L.

(a) Now, after we have defined the formulas used to calculate MPL, Cost of factory, cost of workers and TC of inputs, let us complete the table given in the question.

(b) Ah Ling is operating in the short run. This is because in the short – run, at least one of the factors of production must be fixed. In this case, capital (i.e., the small factory that she rents for RM150 a week in the city centre) is fixed and hence, she is operating in the short run.

(c) In one of the weeks, Ah Ling earns a profit of RM125.

Her revenue for that week is RM1100.

So, her TC = Revenue – Profit = RM1100 – RM125 = RM975.

As we can see from the above table, that when TC of inputs = RM975, the boxes of chocolates that she produces is 780.

(d) She would be incurring a loss of RM150 if she decides to take a break for a week. This is because, the rent for the factory has to be paid, since it is the fixed cost and does not depend on the no. of chocolate boxes produced). Thus, even if Q = 0, TC of inputs = RM150 and so, profit < 0.

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