# ECN 104 Lecture Notes - Average Variable Cost, Diminishing Returns, Marginal Product

Answers to Assignment Five

1. Complete the following table by finding the average and marginal product. At

what input-output level will average variable cost begin to rise? Explain.

Inputs of Total Average Marginal

labour product product product

0 0 _____

1 8 _____ _____

2 18 _____ _____

3 25 _____ _____

4 30 _____ _____

5 33 _____ _____

6 34 _____ _____

Inputs of Total Average Marginal

labour product product product

0 0 0

1 8 8 8

2 18 9 10

3 25 8.33 7

4 30 7.50 5

5 33 6.60 3

6 34 5.67 1

With equal pay for each worker, average variable cost will begin to rise for the

third worker’s output because that is the point where diminishing returns begin.

2. The table below shows the total production of a firm as the quantity of labour

employed increases. The quantities of all other resources employed are constant.

Compute the marginal and average products and enter them in the table.

Marginal Average

Units Total product product

of Labour product of labour of labour

0 0 ––– –––

1 40 ______ ______

2 100 ______ ______

3 165 ______ ______

4 200 ______ ______

5 225 ______ ______

6 240 ______ ______

7 245 ______ ______

8 240 ______ ______

(a) At what levels are there increasing returns to labour and at what levels are

there decreasing returns to labour?

(b) Describe the relationship between the total product and marginal product.

(c) Describe the relationship between marginal and average product.

Marginal Average

Units Total product product

of Labour product of labour of labour

0 0

1 40 40 40

2 100 60 50

3 165 65 55

4 200 35 50

5 225 25 45

6 240 15 40

7 245 5 35

8 240 –5 30

(a) There are increasing returns to labour through the third worker hired.

Decreasing returns to labour set in with the fourth worker.

(b) Where total product increases at an increasing rate, marginal product rises

(from 0 to 65). Where total product is increasing at a decreasing rate, marginal

product is positive but falling (from 65 to 5). Where total product declines,

marginal product is negative from 5 to –5.

(c) Where marginal product is greater than average product, average product

will rise. Where marginal product is less than average product, average product

will fall. Marginal product intersects average product at maximum average

product.

3. Assume that a firm has a plant of fixed size and that it can vary its output only by

varying the amount of labour it employs. The table below shows the

relationships between the amount of labour employed, the output of the firm, the

marginal product of labour, and the average product of labour.

(a) Assume each unit of labour costs the firm $20. Compute the total cost of

labour for each quantity of labour the firm might employ, and enter these figures

in the table.

(b) Now determine the marginal cost of the firm’s product as the firm increases

its output. Enter these figures in the table.

## Document Summary

Complete the following table by finding the average and marginal product. With equal pay for each worker, average variable cost will begin to rise for the third worker"s output because that is the point where diminishing returns begin. The table below shows the total production of a firm as the quantity of labour employed increases. The quantities of all other resources employed are constant. Compute the marginal and average products and enter them in the table. Marginal average product product of labour of labour. 30 (a) there are increasing returns to labour through the third worker hired. Decreasing returns to labour set in with the fourth worker. (b) where total product increases at an increasing rate, marginal product rises (from 0 to 65). Where total product is increasing at a decreasing rate, marginal product is positive but falling (from 65 to 5).