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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