Question

Workers	Quantity of Production	Fixed Cost	Variable Cost	Total Cost	Average Fixed Cost	Average Variable Cost	Average	Marginal Cost
							Total Cost
0	0
1	20
2	60
3	140
4	200
5	240
6	260
7	268
8	272

The table above shows the production and cost schedule for producing t-shirts. Each worker is paid $250 per day and the total fixed cost of capital is $1000. T-shirts can be sold at a local store for $15.

a) Use this information to complete the table.

b) How many workers should the firm hire to maximize the firm’s profits?

c) How many t-shirts will be produced at maximum profits?

Suppose the price of t-shirts falls to $5.

d) Explain how many t-shirts would be supplied in the short-run.

e) Explain how many t-shirts would be supplied in the long-run.

Suppose that prices return to $15 and the workers take this is a sign to negotiate a pay rise to $350 per day.

f) What will be the profit-maximising quantity of t-shirts if their negotiations are successful?

g) Explain which of the cost curves will move and which will stay the same.

Answer 1

Workers	Q	FC	VC	TC	AFC	AVC	ATC	MC
0	0	1000	0	1000
1	20	1000	250	1250	50.00	12.50	62.50	12.50
2	60	1000	500	1500	16.67	8.33	25.00	6.25
3	140	1000	750	1750	7.14	5.36	12.50	3.13
4	200	1000	1000	2000	5.00	5.00	10.00	4.17
5	240	1000	1250	2250	4.17	5.21	9.38	6.25
6	260	1000	1500	2500	3.85	5.77	9.62	12.50
7	268	1000	1750	2750	3.73	6.53	10.26	31.25
8	272	1000	2000	3000	3.68	7.35	11.03	62.50

b)the firm will set P=MC for profit maximization and hire 6 workers

c) T-shirts produced = 260

d) When the price falls to 5

Quantity of t-shirts produced in the short run = 200

e) Quantity of t-shirts produced in the long run = 0