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Calculating average, marginal, and total costs of production

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A firm's only variable input is labor. When 50 workers are used, the average product of labor is 50 , and the marginal product of the 50th worker is 75. The wage rate is $80, and the total cost of the fixed input is $500.
a. Calculate the average variable cost with calculations.
b. Calculate the Marginal cost with calculations.
c. Calculate the average total cost with calculations.
d. Is each of the following statements true or false and why?
- marginal cost is increasing
- average variable cost is increasing
- average total cost is decreasing

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Solution Preview

Quantity (Q) = Labor (L) x Average Product of Labor (APL)
Q = 50x50 = 2500
Total Variable Cost (TVC) = L x Wage(W)
TVC = 50 x 80 = 4000
Average Variable ...

Solution Summary

This solution gives detailed calculations showing how to calculate average, marginal and total costs of production for a firm whose only variable input is labor. All calculations are shown in full.

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Production Function

Use the following information on a hypothetical short-run production function to answer questions a-d.

Units of Labor/Day 5 6 7 8 9

Units of Output/Day 120 140 155 165 168

The price of labor is $20 per day. Ten units of capital are used each day, regardless of output level. The price of capital is $50 per unit.

a. Calculate the marginal and average variable product of each unit of labor input. Hint: plot your Units of labor and Units of Output vertically.

b. Calculate total, average total, average variable, and marginal costs.

c. Can you tell where diminishing marginal returns sets in?

d. Graph the resulting cost curves similar to the graph 5.2 on Page 141 of the textbook.

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