Lab 3: Widget Production and Cost
Names:
Section:
Purpose: To understand the relationship between production technology and economic cost concepts.
Materials: A work surface, stapler, supply of staples, stack of paper, and this lab report form.
We will simulate a widget production process and generate short-run production data and the corresponding economic
cost concepts. A widget is produced by folding a sheet of paper in half and stapling it at each corner. You should be
aware that widgets are quite fragile and break if they fall onto the floor at any time during the production process. The
production of widgets proceeds over a number of periods of a set length (one minute).
1.
Generating the data. As the experiment progresses, fill in the first two columns of the table below. After the
experiment is completed you are to complete the table. Assume that the price of labor is $10 per worker and the price of
capital is $20 per unit. Each widget sells for $3.00 per unit in the market. [5 pts]
K
L
q
AP
MP
P
TR
FC
VC
TC
MC
Definitions:
K = capital (the fixed input)
L = labor (the variable input)
q = output (also known as total product)
AP = q/L = average product of labor
MP = q/L = marginal product of labor
FC = (Price of capital) * (units of capital) = fixed cost
VC = (Price of labor) * (units of labor) = variable cost
TC = FC + VC = total cost
MC = TC/q = marginal cost
AFC = FC/q = average fixed cost [Note that FC = AFC*q]
AVC = VC/q = average variable cost [Note that VC = AVC*q]
ATC = TC/q = AFC + AVC = average total cost [Note that TC = ATC*q]
 = TR - TC = profit
TR = P*q = total revenue
P = price of widget
AFC
AVC
ATC

2.
Representing the information using graphs. Plot the following four graphs using your favorite spreadsheet
package. (If you are uncomfortable using spreadsheets, you may draw the graphs by hand using the attached charts.)
Please make sure that you label all axes and curves. [5 pts]
Graph 1: Production Function. Plot an X-Y graph with L on the horizontal axis and q on the vertical axis.
Graph 2: Marginal Product and Average Product. Plot an X-Y graph with L on the horizontal axis and MP and AP
measured along the vertical axis.
Graph 3: Total Cost Curves. Plot an X-Y graph with q on the horizontal axis and the cost data on the vertical axis.
Graph 4: Marginal and Average Cost Curves. Plot an X-Y graph with q on the horizontal axis and the cost data on the
vertical axis.
3.
Questions.
a)
What would happen to the quantity of widgets produced if an additional stapler was added to the production
process? Using a different color, sketch in the likely impact on the production function in Graph 1 below. Briefly
explain. [2 pts]
b)
Look closely at the shapes of the marginal product and marginal cost curves. At what employment level does
diminishing marginal returns (DMR) begin? Identify this level on Chart 2. At what output level does DMR begin?
Identify this level on Chart 4. [2 pts]
c)
Suppose the price of labor increased to $15 per worker. Which of the cost curves in Graphs 3 and 4 would be
affected? In which direction would the cost curves move, if at all? [4 pts]
d)
Suppose the price of capital increased to $30 per unit. Which of the cost curves in Graphs 3 and 4 would be
affected? In which direction would the cost curves move, if at all? [4 pts]
e)
Given that the market price of each widget sold is $3.00, how many workers should be hired if the objective is to
maximize profits? How many widgets would be produced at this employment level? How does the price of a widget
compare with the marginal cost of additional output beyond the profit maximizing level? [3 pts]