Question

Patty and Ben operate a small company that produces bicycles. Their fixed cost is $ 4000 per month. They can hire workers for $ 4000 per month. Their monthly production function for bicycles is as given in the following table:

Quantity of Labour Quantity of Bicycles
0 0

1 10

2 30

3 60

4 120

5 170

6 200

7 220

8 230

a.) For each quantity of labour calculate the following: total product (TP), marginal product (MP), average productivity (AP), average variable cost (AVC), average fixed cost (AFC), average total cost (ATC), and marginal cost (MC).
b.) On one diagram draw the MP and AP
c.) On one diagram draw the AVC, ATC, and MC
d.) At what point does Patty and Ben experience decreasing marginal productivity? At what level of output are ATC minimized?

Answer 1

(a) The calculated values are shown in the first table, whereas the formula view of the calculations can be found in the next table.

(b) The marginal product (MP) and the average product (AP) curves are shown below.

(c) The avc, ATC and MC curves are shown below

(d) As shown in the table and plot of marginal product, decreasing marginal productivity is exprerienced at labor = 4. Till L = 4, MP rises, beyond which it starts declining.

On the other hand, ATC is minimum (140) at output = 200 as shown in the table as well as in the above diagram.