Question

7.  Suppose your firm’s short-run production function is given as

                                      Labor                                      Total Output

                                          0                                                   0

                                          1                                                   5

                                          2                                                  12

                                          3                                                  20

                                          4                                                  28

                                          5                                                  34

                                          6                                                  39

                                          7                                                  43

                                          8                                                  46

Assume that labor can be hired for $50 per worker and that your fixed cost is $1,000.

     a.  What is the total variable cost of producing 5 units of output?

     b.  What is the average variable cost of producing 12 units of output?

     c.  What is the total cost of producing 20 units of output?

     d.  What is the average total cost of producing 28 units of output?

     e.  What is the marginal cost of producing 34 units of output?

8.  With the table below, answer the questions which follow.

                                      Labor                                      Output

                                          0                                               0

                                          1                                           1,500

                                          2                                           3,400

                                          3                                           5,100

                                          4                                           6,500

                                          5                                           7,400

                                          6                                           8,000

                                          7                                           8,300

                                          8                                           8,300

                                          9                                           8,200

     a.  Diminishing returns begins with which unit of labor?

     b.  What is the marginal product of the fourth unit of labor?

     c.  What is the average product if the sixth unit of labor?

     d.  Stage 3 of production begins with which unit of labor?

     e.  What is the marginal product of the ninth unit of labor?

9.   Answer each of the following as True or False.

     

      a.  A good Manager, i.e., one who wants to maximize profit or minimize loss, will not

           operate in Stage III of production.

      b.  In the market period, the supply curve is perfectly elastic.

      c.  When increasing returns to scale exist, long-run average cost increases as output

           increases.

      d.  The law of diminishing returns is relevant for the short-run.

      e.  Average fixed cost always decreases as output increases.

10.  a.  What is the difference between fixed proportions and variable proportions production?

       b.  What is the price elasticity of supply?

       c.  What does it mean if supply is price inelastic?

       d.  Why is supply more elastic in the long-run than the short-run?

Answer 1

Answer.(7).

Labour	Total output
0	0
1	5
2	12
3	20
4	28
5	34
6	39
7	43
8	46

Hiring cost of labour i.e wage is $50 per worker. Fixed cost is $1,000.

Answer. Part - (a).

5 units of output are produced by 1 labour.

Total variable cost of 5 units output

= Labour requirement*Wage = 1*$50 = $50. (Answer).

Part - (b). Marginal product of 4th unit of labour is Total output produced by 4 unit of labour - Total output produced by 3 units of labour

MP of 4th unit of labour = TP of 4 Labours - TP of 3 labours

MP of 4th unit of labour = 28 units - 20 units = 8 units.

Therefore, MP of 4th unit of labour = 8 (Answer).

Part - (C).

Total cost of producing 20 units of output = TVC + TFC

TVC of producing 20 units of output is = Total labour requirement to produce 20 units of output multiplied by wage.

TVC of producing 20 units of output = (3 Labours)*Wage

TVC of producing 20 units of output = 3*$50 = $150.

TFC is = $1,000.

TC of producing 20 units of output = TVC + TFC

TC of producing 20 units of output = $150 + $1,000

So, TC of producing 20 units of output = $1,150. (Answer).

Part - (d). Average total cost of producing 28 units of output = TC of production of 28 units of output/Total output

TC of production of 28 units of output = TVC + TFC

TVC to produce 28 units of output = Labour requirement to produce 28 units of output multiplied by wage.

TVC to produce 28 units output = 4*$50 = $200.

TFC is $1,000.

Therefore, TC of producing 28 units of output = $200 + $1000 = $1,200.

Average total cost (ATC) of 28 units of output = $1,200/28 = $42.85  (Answer.)

Part - (e). Marginal cost of producing 34 units can be calculated as follows -

MC = ∆TC /∆Q

TC at 28 units of output = $1,200 (Calculated in part 'd')

TC at 34 units of output = 5*$50 + $1,000 = $1,250.

Therefore, MC of 34 units of output = ∆TC/∆Q

MC of 34 units of output = ($1250 - $1200)/(34 - 28)

MC of 34 units of output = $50/6 = $8.333 (Answer).