ECONOMICS 2306 - Baylor University



ECONOMICS 2306

HOMEWORK, CHAPTER 7

Name ___________________

Class day & time __________

1. Bertha Baker loves to bake cookies and wants to start a cookie business in her home. She plans to hire some of her friends to work for her. She has projected the number of cookies that could be produced each day depending on the number of workers she hires: (Assume that labor is the only variable resource.)

|Labor (workers per day) |Output (cookies per day) |Marginal |

| | |Product |

|0 | 0 | |

|1 | 100 | |

|2 | 300 | |

|3 | 600 | |

|4 |1,200 | |

|5 |1,700 | |

|6 |2,000 | |

|7 |2,200 | |

|8 |2,300 | |

a. Complete the table above by calculating the marginal product (MP) of labor.

b. On the graph below, plot the total product (TP) curve and the marginal product (MP) curve. Scale the vertical axis in 100-unit (i.e., 100-cookie) increments and the horizontal axis in 1-worker increments. Label each curve.

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c. Explain the relationship between TP and MP.

At what point do diminishing marginal returns set in? How do you know?

Describe some of the factors that might cause diminishing returns to occur in Bertha’s business.

2. Bertha is planning to pay each of her workers $60 a day. She has also calculated that the fixed costs of her business will be $100 a day.

a. The first two columns from the table in part 1 are reproduced below for your convenience. At this time, complete the columns for FC, VC, TC, and MC. (Remember that MC = ΔTC ÷ ΔQ of output.)

Labor (workers per day) |Output (cookies per day) |

FC |

VC |

TC |

MC |

AFC |

AVC |

ATC | |0 | 0 | | | | | | | | |1 | 100 | | | | | | | | |2 | 300 | | | | | | | | |3 | 600 | | | | | | | | |4 |1,200 | | | | | | | | |5 |1,700 | | | | | | | | |6 |2,000 | | | | | | | | |7 |2,200 | | | | | | | | |8 |2,300 | | | | | | | | |

b. Compare the MP from part 1 to the MC found above.

For workers 1, 2, 3, and 4, MP is ____________(rising or falling?) and MC is __________.

For workers, 5, 6, 7, and 8, MP is ____________ and MC is ____________.

Why is this relationship significant?

c. On the first graph below, plot the FC, VC, and TC curves. Scale the vertical axis in $20 increments and the horizontal axis in 100-unit (i.e., 100-cookie) increments. (Do not plot the MC curve yet.) Label each curve.

Carefully observe the shapes of the curves: look at where they begin, whether or not they rise or fall, whether they rise or fall rapidly or slowly relative to output, etc.

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3. Now return to the table in part 2 and complete the columns for AFC, AVC, and ATC.

a. Look at the AFC column: What happens to AFC as output increases from 0 units to 2,300 units? Why?

b. Look at the MC and AVC columns. What impact does MC have on AVC as output rises from 0 units to 1,700 units? Then what impact does MC have on AVC as output rises beyond 1,700 units?

c. Look at the MC and ATC columns. Explain the relationship that exists between MC and ATC; be specific about the ranges of output over which these costs fall or rise.

d. On the second graph on the previous page, plot the MC, AFC, AVC, and ATC curves. Scale the vertical axis in $0.05 increments and the horizontal axis in 100-unit increments. Label each curve. (Note: the very first ATC value, which should be $1.60, will not fit on the graph, so just ignore it.)

Carefully observe the shapes of these curves: What happens to AFC as output increases? What is the relationship between MC and AVC? What is the relationship between MC and ATC? (You answered these questions already in parts 3.a., 3.b., and 3.c., didn’t you?)

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