Cost of Production in the Short-run. SHOW FORMULA IN EXCEL Price of Labor (L) is PHP...

Cost of Production in the Short-run. SHOW FORMULA IN EXCEL

Price of Labor (L) is PHP 100 while Price of Capital (K) is PhP 50. What is the best cost-minimizing combination of K and L?

Price of Capital (K)	Price of Labor (L)	TP aka Q	Total Fixed Cost	Total Variable Cost	Total Cost	Ave Fixed Cost	Ave Variable Cost	Ave Total Cost	Marginal Cost
10	0	0
10	1	14
10	2	35
10	3	62
10	4	91
10	5	121
10	6	150
10	7	175
10	8	197
10	9	212
10	10	217

Solutions

Expert Solution

Solution:

With quantity of capital employed fixed at 10, fixed cost is price of capital*quantity of capital = 50*10 = 500. Similarly, total variable cost can be found using the variable input.

Total cost = total fixed cost + total variable cost

Average = total/quantity, so we can fill in the table as follows:

Capital, K	Labor, L	Q	TFC	TVC	TC	AFC	AVC	ATC
10	0	0	500	100*0 = 0	500 + 0 = 500	-	-	-
10	1	14	500	100*1 = 100	500 + 100 = 600	500/14 = 35.71	100/14 = 7.14	600/14 = 42.86
10	2	35	500	100*2 = 200	500 + 200 = 700	500/35 = 14.29	200/35 = 5.71	700/35 = 20
10	3	62	500	100*3 = 300	500 + 300 = 800	500/62 = 8.06	300/62 = 4.84	800/62 = 12.9
10	4	91	500	100*4 = 400	500 + 400 = 900	500/91 = 5.49	400/91 = 4.4	900/91 = 9.89
10	5	121	500	100*5 = 500	500 + 500 = 1000	500/121 = 4.13	500/121 = 4.13	1000/121 = 8.26
10	6	150	500	100*6 = 600	500 + 600 = 1100	500/150 = 3.33	600/150 = 4	1100/150 = 7.33
10	7	175	500	100*7 = 700	500 + 700 = 1200	500/175 = 2.86	700/175 = 4	1200/175 = 6.86
10	8	197	500	100*8 = 800	500 + 800 = 1300	500/197 = 2.54	800/197 = 4.06	1300/197 = 6.6
10	9	212	500	100*9 = 900	500 + 900 = 1400	500/212 = 2.36	900/212 = 4.25	1400/212 = 6.6
10	10	217	500	100*10 = 1000	500 + 1000 = 1500	500/217 = 2.3	1000/217 = 4.61	1500/217 = 6.91

Minimum average variable cost occurs at input combination of 10 units of capital and 7 units of labor, so this is the required input combination.

Rahul Sunny answered 1 year ago

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