Question

PROBLEM 1)  

labor workers...............output....................TFC (dollar)................TVC

0....................................0...............................20...........................0

1.....................................4................................20..........................25

2..................................9..................................20............................50

3..................................13..................................20.............................75

4...................................16..................................20.............................100

5...................................18..................................20............................125

a) The above table shows a firm's: • short-run and long-run costs. • long-run costs. • short-run costs. • More information is needed to determine if the costs are long-run costs or short-run costs.

b) Using the data in the above table, when output increases from 4 to 9 units, the marginal cost of one of those 5 units is: • $4.25. • $4.00. • $6.25. • $5.00.

Answer 1

Answer 1

(a)

In short run a firm hires some input which is fixed and because of this firm incurs some fixed cost is the long run while in the long run all inputs are variable and thus not incurs fixed cost in the long run.

Here firm is incurring a total fixed cost(TFC) of 20 and thus this is the short run situation.

Hence, the correct answer is (c) short run costs

(b)

Marginal cost = (Change in TC)/Change in Output

Here, Output increases from 4 to 9 => Change in Output = 9 - 4 = 5

TC = Total Cost = TFC + TVC.

When Output = 4, TC = 20 + 25 = 45 and When Output = 7, TC = 20 + 50 = 70

Thus Change in TC = 70 - 45 = 25

So, Marginal cost = (Change in TC)/Change in Output = 25/5 = 5

Hence, the correct answer is (d) $5.00