A bakery produces bread. Its variable factor of production is labor and its fixed factor of production is the rent it pays on a building. The following table gives the amount of output that the company produces with a given number of employees.
|
Employees (per day)
|
Output (per day)
|
Fixed Cost
|
Variable Cost
|
Total Cost
|
Avg. Var. cost
|
Avg. Total Cost
|
Marginal Cost
|
|
0
|
0
|
|
|
|
|
|
|
|
1
|
24
|
|
|
|
|
|
|
|
2
|
60
|
|
|
|
|
|
|
|
3
|
120
|
|
|
|
|
|
|
|
4
|
168
|
|
|
|
|
|
|
|
5
|
210
|
|
|
|
|
|
|
|
6
|
246
|
|
|
|
|
|
|
|
7
|
276
|
|
|
|
|
|
|
|
8
|
300
|
|
|
|
|
|
|
|
9
|
318
|
|
|
|
|
|
|
|
10
|
330
|
|
|
|
|
|
|
1.) Calculate the company's marginal product of labor (add a column to the table). Does the bakery obey the law of diminishing marginal returns? Explain.
2.) Suppose that the bakery has fixed costs of $25 per day and that each employee earns $25 per day. Expand the table above by adding columns for fixed cost, variable cost, and total cost. Next, expand the table to include average variable cost, average total cost, and marginal cost.
3.) For the price of 85¢/unit, add a column to your table showing the total revenue and total profit at each amount of output. Repeat for the price of $1.40/unit and a price of 55¢/unit. For each price, how many units of output should the firm produce to maximize profits?
4.) Create a graph with average total cost, average variable cost, and marginal cost measured on the vertical axis and output measured on the horizontal axis (see figure 9.2 in your textbook). Add horizontal price lines for the three prices in question 3. For each price, what is the relationship between price and marginal cost at the profit-maximizing output indicated in question 3? Based on your response, where does the supply curve come from?