Question

Easton Plate Glass sells glass for $3 per unit in a highly competitive market. The firm produces output using capital (which it rents at $75 per hour) and labor (which is paid a wage of $15 per hour under a contract for 20 hours of labor services). Complete the following table and use that information to answer the questions that follow.

L	K	Q	MPL	APL	APK	VMPL
0	40	0
1	40	75
2	40	225
3	40	450
4	40	550
5	40	600
6	40	612.5
7	40	620
8	40	625
9	40	500
10	40	350
11	40	100

a, Identify the fixed and variable inputs.

b, What are the firm’s fixed costs?
c, What is the variable cost of producing 600 units of output?
d, How many units of the variable input should be used to maximize profits?
e, What are the maximum profits this firm can earn?
f, Over what range of the variable input usage does increase marginal returns exist?

g, Over what range of the variable input usage do decrease marginal returns exist?

h, Over what range of input usage do negative marginal returns exist?

Answer 1

L	K	Q	MPL	APL	APK	VMPL
0	40	0
1	40	75	75	75	1.875	225
2	40	225	150	112.5	5.625	450
3	40	450	225	150	11.25	675
4	40	550	100	137.5	13.75	300
5	40	600	50	120	15	150
6	40	612.5	12.5	102.0833	15.3125	37.5
7	40	620	7.5	88.5714	15.5	22.5
8	40	625	5	78.125	15.625	15
9	40	500	-125	55.5556	12.5	-375
10	40	350	-150	35	8.75	-450
11	40	100	-250	9.0909	2.5	-750

a) Capital is the Fixed input and Labor is the variable input

b) Firms fixed cost = capital*rent = 40*75 = 3000

c) VC of producing 600 units of output =labor*wages = 5*15 = 75

d) The firm will employ the labor until the VMPL = wage

As labor is the variable input and its wage = 15

so the firm will hire 8 labor