ECON 101 Lecture Notes - Lecture 19: Marginal Product, Diminishing Returns, Fixed Cost
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Suppose a farmer rents 15 acres of alnd for $2000 per acre. Suppose he pays his labroers $18000 each for a full season of work. His production function is:
Labor (per season) | 6 | 11 | 15 | 21 | 31 | 45 | 63 |
Output (tons) | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Complete the table below. Divide FC, VC, and TC by 1000 to get a number that fits in the cell. Only use two significant digits if the answer is a decimal.
L | Q | APL | MPL | FC | VC | TC | MC | AFC | AVC | ATC |
6 | 1 | |||||||||
11 | 2 | |||||||||
15 | 3 | |||||||||
21 | 4 | |||||||||
31 | 5 | |||||||||
45 | 6 |
Each unit of input, X, costs $10. Fixed costs are $50, regardless of the level of output.
a.Complete the table below.
Labor, X | Total Output (TPP) | Marginal Physical Product (MPP) | TFC | TVC | TC | AFC | AVC | ATC | MC/unit |
0 | 0 | ||||||||
1 | 15 | ||||||||
2 | 45 | ||||||||
3 | 70 | ||||||||
4 | 90 | ||||||||
5 | 105 | ||||||||
6 | 110 | ||||||||
7 | 112 |
b.If the product can be sold for $0.75 per unit, what is the optimal level of output?
C. Find the level of profit at the optimal level of output. Explain what would happen if the firm produced one more unit of output in terms of marginal cost and marginal revenue.
Answer the following questions pertaining to the graph.
1. What is the shape of the AVC and ATC curves? What economic law accounts for this shape? How do you know this?
2. What is the shape of the MC curve? Why does it have this shape? How do you know this?
3. What do you know about the values of AVC and ATC at the points where MC crosses them?
4. Is the AVC higher than the ATC or lower than it? How do you know this?
5. Is the costs in the short run or the long run? How do you know this?
6. Assume the company above is in a Perfect Competition Industry: If the price of the product is $20 that is sold at, what will be the profits and how many will be sold at that price? Can the company raise the price?
7. Again in a Perfect Competition Industry: What would the profit situation be at a price of $30, how much to sell at that price?
8. With the Perfect Competition industry: What would the profit situation be at a price of $10, how much to sell at that price?
9. What are the characteristics of a perfect competition company and industry?
Following is the complete table -
Q |
FC |
VC (TC-FC) |
TC |
AFC (FC/Q) |
AVC (VC/Q) |
ATC (TC/Q) |
MC (TCn-TCn-1) |
0 |
10 |
0 |
10 |
- |
- |
- |
- |
1 |
10 |
10 |
20 |
10 |
10 |
20 |
10 |
2 |
10 |
18 |
28 |
5 |
9 |
14 |
8 |
3 |
10 |
23 |
33 |
3.33 |
7.67 |
11 |
5 |
4 |
10 |
33 |
43 |
2.5 |
8.25 |
10.75 |
10 |
5 |
10 |
48 |
58 |
2 |
9.6 |
11.6 |
15 |
6 |
10 |
68 |
78 |
1.67 |
11.33 |
13 |
20 |
7 |
10 |
98 |
108 |
1.43 |
14 |
15.42 |
30 |
8 |
10 |
148 |
158 |
1.25 |
18.5 |
19.75 |
40 |