Microeconomic Problem
1. Suppose a business finds that output varies according to the following schedule as it adds more workers:
|
Workers
|
Total Product
|
Marginal Product
|
Average Product
|
|
0
|
0
|
|
-
|
|
1
|
10
|
|
10
|
|
2
|
25
|
|
12.5
|
|
3
|
42
|
|
|
|
4
|
58
|
|
|
|
5
|
70
|
|
|
Fill in the marginal product and average product columns. Diminishing marginal returns is encountered with the addition of which worker?
2. Notice that average product (that is, output per worker) continues to rise after marginal product has fallen. Why? How can it be that output per worker can rise after the point of diminishing returns has been encountered?
3. Suppose a firm has the following output and cost structure:
|
Output
|
Total Cost
|
Marginal Cost
|
|
0
|
15
|
|
|
1
|
25
|
|
|
2
|
30
|
|
|
3
|
45
|
|
|
4
|
65
|
|
|
5
|
90
|
|
|
6
|
120
|
|
|
7
|
155
|
|
|
8
|
195
|
|
|
9
|
240
|
|
|
10
|
290
|
|
Fill in the marginal cost column.
Now, answer the following questions based on your completed table:
4. What is the average fixed cost for the third unit of output? (Hint: What type of costs will be encountered at output 0?)
5. What is the average variable cost for the 5th unit of output?
6. What is the average total cost for the 10th unit of output?
7. Why does the marginal cost of producing the product fall and then rise? (What is the relationship between the cost curves and the production function?)
8. What is the relationship between the marginal cost and the average variable and average total costs? You may fill in all the appropriate numbers and draw a graph with MC, TVC, AVC, TC, ATC, TFC, and AFC, if you wish.