Question

Suppose you are given the following partially complete table. You have a meeting with the chief financial officer in fifteen minutes and he is expecting this information in its entirety. Note: all labor units are paid equally and labor is the firm’s only variable input.     

             Labor               Q              Fixed Cost       Variable Cost              Total Cost                   

            =========================================================          

            0                      0                      ______                        $0                    ______           

            1                      1,500               ______                        ______            ______

            2                      4,500               ______                        ______            ______

            3                      6,000               ______                        ______            ______

            4                      7,200               ______                        $400                ______

            5                      8,000               ______                        ______            $7,500

b) The CFO is also interested in learning more about diminishing marginal returns. What would you tell him, and how would you explain where your company first encounters this phenomenon? Additionally, at which worker do diminishing marginal returns BEGIN?

c) The CFO also wants to know what the average fixed cost and the average total cost of the output is when the company produces 8,000 units. What would you tell him?

Answer 1

L	Q	FC	VC	TC	MRP
0	0	7000	0	7000
1	1500	7000	100	7100	1500
2	4500	7000	200	7200	3000
3	6000	7000	300	7300	1500
4	7200	7000	400	7400	1200
5	8000	7000	500	7500	800

FC=7000

Because at L=4, VC=400, and since all the labor are being paid equally so VC per labor is 400/4 = 100 and at L=5, TC is 7500 so the fixed cost = 7500-500=7000

b) MRP starts decreasing when the firm hires 3rd labor so diminishing returns starts with 3rd worker

c) AFC at Q=8000

=FC/Q = 7000/8000 = 0.875

ATC = TC/Q = 7500/8000 = 0.9375