EXERCISES: PRODUCTIVITY AND COSTS OF PRODUCTION
PRODUCTION AND COSTS
EXERCISE #1
Assume 0 depreciation cost.
Accounting Profits
72,000-(12,000+5,000+20,000) = 72,000-37,000 = $35,000
Economic Profits
72,000-37,000-(4,000+15,000+3,000) = $13,000
EXERCISE #2: PRODUCTION
Inputs Total Marginal Average
of labor product product product
0 0 __
15
1 15 15
19
2 34 17
17
3 51 17
14
4 65 16.25
9
5 74 14.80
6
6 80 13.33
3
7 83 11.85
-1
8 82 10.25
c. Workers 1 and 2; MP increasing.
d. Worker 3; MP decreasing.
e. Workers 3 through worker 8; MP decreasing.
f. No, MP negative.
EXERCISE #3: COSTS OF PRODUCTION
Total Total Total Total Marginal
Product fixed variable cost cost
Cost cost
0 $60 $0 $60
45
1 60 45 105
40
2 60 85 145
35
3 60 120 180
30
4 60 150 210
35
5 60 185 245
40
6 60 225 285
45
7 60 270 330
55
8 60 325 385
65
9 60 390 450
75
10 60 465 525
Total Average Average Average
Product fixed variable total cost cost cost
______________________________________________________
0 $--- $--- $---
1 60 45 105
2 30 42.5 72.5
3 20 40 60
4 15 37.5 52.5
5 12 37 49
6 10 37.5 47.5
7 8.57 38.57 47.14
8 7.5 40.6 48.12
9 6.66 43.3 50
10 6 46.5 52.5
c. Shape reflects increasing returns to labor (decreasing costs per unit) and diminishing marginal returns to labor (increasing costs per unit).
If MC is below ATC and AVC, ATC and AVC must be falling. If MC is above ATC and AVC, ATC and AVC must be rising. MC intersects ATC and AVC from below and at their lowest points.
EXERCISE #4: MC, AVC AND ATC
a. MC = $13
b. ATC = $9
c. AVC = $5
d. AFC = 4
e. TC = $9 x 100 = $900
f. VC = $5 x 100 = $500
g. FC = $900 - $500 = $400
h. Vertical distance = AFC
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