Question

Question 5 – ALL CALCULATIONS MUST BE SHOWN

The table below contains information about weekly production and costs of a firm.

Number of Workers	Output (units)	Marginal Product of Labour	Fixed Cost (capital)	Variable Cost (labour)	Total Cost	Marginal Costs	Average Fixed Costs	Average Variable Costs	Average Total Costs
0		--				--	--	--	--
1	330		$600	$300
2		375	$600		$1,200
3	1020		$600		$1,500
4	1260		$600	$1,200
5		150	$600		$2,100
6	1470		$600	$1,800

a. Complete the table. There are 40 empty cells. [marked as 0.2 marks per cell correctly filled].

b. In one particular week the firm breaks exactly even. If the firm's revenue for the week is $1800, what is the level of output sold? (1 mark)

c. Is there a level of output at which diminishing returns to labour commence? If so identify this level of output and explain why diminishing returns to labour might occur.

d. The price currently received by the firm is $1.80 for each unit of output. The firm has received an order for 2,000 units of output per week for the next two months. If the firm expects the trend in the marginal product of labour will continue in the same direction, should the firm commit to the order? Explain your answer.

e. Plot each of the following curves for the firm on a single diagram.

i. Average variable costs

ii. Average total costs

iii. Marginal costs

iv. Average fixed costs

Illustrate and explain which of the curves will shift, and in which direction, due to a decrease in the cost of labour. Hint: use the definitions of the different costs to assist in determining which costs will change.

Answer 1

Number of Workers	Output (units)	Marginal Product of Labour	Fixed Cost (capital)	Variable Cost (labour)	Total Cost	Marginal Costs	Average Fixed Costs	Average Variable Costs	Average Total Costs
0	---
1	330	330	600	300	900	900	600	300	900
2	705	375	600	600	1200	300	300	300	600
3	1020	315	600	900	1500	300	200	300	500
4	1260	240	600	1200	1800	300	150	300	450
5	1410	150	600	1500	2100	300	120	300	420
6	1470	60	600	1800	2400	300	100	300	400

b.We know break even point will be at that point where TR=TC

Given TR=1800

In the above table TC=1800 where output is 1260.

Thus the level of output sold is 1260.

c.Yes after 705 output when additional labor is added diminishing returns to labor starts because marginal product of labor starts falling.Diminishing product of labor occurs when keeping fixed factor fixed if we continue to increase more and more variable factor here labor than the total product increases but at a diminishing rate.

d.If the firm expects the trend in the marginal product of labor will to in the same direction the firm should not commit the order because if this trend continues than stage of negative return will start and it is not a wise decision to take the order till the firm can vary its fixed factor.

FORMULA USED IN THE ABOVE TABLE:

1.MP=CHANGE IN TP/CHANGE IN Q

2.TC=TFC+TVC

3,TFC=TC-TVC

4.TVC=TC-TFC

5.AC=TC/Q

6.AFC=TFC/Q

7.AVC=TVC/Q