Question

suppose that a firm's only variable cost is labor. when 100 workers are used, the average product of labor is 60, and the marginal product of the 100th worker is 50. the wage rate is $25 and the total fixed cost is $1000. (show all calculations)

A) what is the average variable cost?

B) what is the marginal cost?

C) what is the average total cost?

D) The following are either true or false. indicate which is correct and explain.

-Marginal cost is increasing

-Average variable cost is increasing

-Average total cost is decreasing

Answer 1

A) Average variable cost = total variabl cost/quantity

= (100x25)/quantity

now at 100 workers, average product is 60.

average product = total product/no of labor

60 = total product/100

total product = 6000

average variable cost = 2500/6000

= 0.417

B)marginal cost is $25 as labor is the only variable factor with a wage of $25.

C) Total cost = variable cost + fixed cost

= 2500+1000

= 3500

average total cost = total cost/quantity

= 3500/6000

= 0.583

D) Marginal cost is increasing - FALSE

As marginal cost is constant at $25.

Average variable cost is increasing - FALSE

As the average variable cost is decreasing.

Average total cost is decreasing - TRUE