1.
The Relationship Between Productivity and Cost
This exercise is designed to illustrate the relationship between productivity and costs with a minimum of
figures.
Assume the cost associated with the fixed factors is $30 and the cost of each variable unit is $10 .
(A)
Complete the following table.
UNITS OF
VARIABLE
FACTOR
0
TOTAL
PRODUCT
MARGINAL
PRODUCT
0
AVERAGE
PRODUCT
TOTAL
COST
0
$ 30
2
$ 40
2
1
2
5
______
7
______
______
8
______
8
(B)
______
______
______
______
______
5
______
______
______
4
$ 20.00
_____
______
3
AVERAGE
TOTAL
COST
$ 5.00
3
2
MARGINAL
COST
______
______
______
______
______
Graph the total, average, and marginal product curves, and the three cost curves. Remember that
these “marginal” points are plotted at the midpoints of the intervals on the horizontal axis. Briefly
describe how these curves are related
This problem concerns a hypothetical manufacturing firm that produces Tye dyed Tshirts for sale in a purely
competitive market. With a plant of given size, the firm can turn out the quantities of T shirts shown in the following
table, by varying the amount it uses of a single variable input, labour.
NUMBER of
T shirts.
10
LABOURHOURS
6.50
20
11.00
30
14.50
40
17.50
50
20.50
60
23.75
70
27.50
80
32.00
90
37.50
100
44.50
110
53.50
120
65.00
130
79.50
140
97.50
NUMBER of
T shirts.
10
LABOURHOURS
6.50
20
11.00
30
14.50
40
17.50
50
20.50
60
23.75
70
27.50
80
32.00
90
37.50
100
44.50
110
53.50
120
65.00
130
79.50
140
97.50
TVC
MP
TC
AP
MC
AVC
ATC
Suppose the firm can hire all the labour it would ever want at the going wage of $12 per labour-hour. The firm’s
total fixed costs are $96 per day.
A)
B)
C)
Fill in the table showing total variable cost (TVC), total cost (TC), average variable cost (AVC), average
total cost (ATC), and marginal cost (MC). [Remember: Marginal cost should be entered midway between
rows of output.]
On a graph with T shirts (per day) on the horizontal axis, draw the three “per-unit” cost curves, AVC, ATC,
and MC. [Note that the marginal cost values from your table should be plotted on the graph midway
between the corresponding units of output.]
Consider (separately) the following alternative market prices that the firm might face: P = $7.50, P = $6, P
= $4.95, P = $4.20 Assuming that the firm wants to maximize its profit, for each of the above prices,
answer the following questions: Approximately how many Tshirts per day would the firm produce? How
do you know? Is the firm making a profit at that price? And if so, approximately how much?