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Calculating various production costs

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.

Solution Preview

Please refer attached file for better clarity of tables and graphs. Graphs are not visible in this section.

Solution:

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
Table 1
Output Labor Capital Marginal Product of labor Average Variable Product
Change in Output/Change in labor Output/Labor
120 5 10 24.0
140 6 10 20 ...

Solution Summary

Solution describes the steps for calculating variable costs, fixed costs, total costs, average variable cost, average fixed cost and maginal costs. It also explains where diminishing returns take place.

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