Question

Servings	MU boeuf bourguignon
1	$60.00
2	$58.00
3	$56.00
4	$54.00
5	$52.00
6	$50.00
7	$48.00
8	$46.00
9	$44.00
10	$42.00
11	$40.00
12	$38.00
13	$36.00
14	$34.00

Production. Ella makes boeuf bourguignon using equipment that she rents for $75 and beef, potatoes, wine and other ingredients that cost $12.50 a serving. (Note that she signed a lease and pays the rent regardless of how many dinners she serves.) She hires workers at $25 each and finds that they produce servings according to the following schedule:

Servings	Total Workers
1	0.30
2	1.00
3	1.90
4	3.00
5	4.30
6	5.80
7	7.50
8	9.40
9	11.50
10	13.80
11	16.30
12	19.00
13	21.90
14	25.00

a. Calculate and graph the marginal cost of each serving. (Use a spreadsheet show all your calculations!) Why does the MC curve have the slope (up, down, or flat) that it does?

b. Calculate and graph the marginal cost of each serving if workers become more productive so each serving can be made with only 70% as much labor. Show your calculations! Calculate and graph marginal cost if workers suffer a 30% pay cut with the old productivity. Compare the effect on MC of the productivity increase with the pay cut.

Answer 1

a)

Servings	Workers	variable cost	Marginal cost
1	0.3	20	20
2	1	50	30
3	1.9	85	35
4	3	125	40
5	4.3	170	45
6	5.8	220	50
7	7.5	275	55
8	9.4	335	60
9	11.5	400	65
10	13.8	470	70
11	16.3	545	75
12	19	625	80
13	21.9	710	85
14	25	800	90

Marginal cost is upward sloping because it is increasing with production.

b)

Servings	Workers	variable cost	Marginal cost (after increased productivity)
1	0.21	17.75	20
2	0.7	42.5	24.75
3	1.33	70.75	28.25
4	2.1	102.5	31.75
5	3.01	137.75	35.25
6	4.06	176.5	38.75
7	5.25	218.75	42.25
8	6.58	264.5	45.75
9	8.05	313.75	49.25
10	9.66	366.5	52.75
11	11.41	422.75	56.25
12	13.3	482.5	59.75
13	15.33	545.75	63.25
14	17.5	612.5	66.75