ECO100Y1 Lecture Notes - Marginal Product
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Use the following information on a hypothetical short-run production function to answer questions A-C.
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 product (MP) and average variable product (AP) of each unit of labor input.
(B). Calculate total (TC), average total (ATC), average variable (AVC), and marginal costs (MC).
(C). Can you tell where diminishing marginal returns sets in?
Labor (L) | Output (Q) | MP | AP | TC | ATC | AVC | MC |
5 | 120 | -- | Ā | Ā | Ā | Ā | -- |
6 | 140 | Ā | Ā | Ā | Ā | Ā | Ā |
7 | 155 | Ā | Ā | Ā | Ā | Ā | Ā |
8 | 165 | Ā | Ā | Ā | Ā | Ā | Ā |
9 | 168 | Ā | Ā | Ā | Ā | Ā | Ā |
Given the following information for Mary's taco shop (TP, AP, and MP are measured in tacos):
Labor (L) |
Total Product (tacos) (TP) |
Average Product (tacos) (AP) |
Marginal Product (tacos) (MP) |
0 |
0 |
-- |
-- |
1 |
Ā |
Ā |
20 |
2 |
Ā |
25 |
Ā |
3 |
Ā |
Ā |
50 |
4 |
150 |
Ā |
Ā |
5 |
Ā |
36 |
Ā |
6 |
200 |
Ā |
Ā |
7 |
Ā |
30 |
Ā |
8 |
210 |
Ā |
Ā |
a) Fill in the blanks above. (Round each answer to the nearest taco)
Please note there are no numbers for MP and AP when output is zero tacos.
b) Define the law of diminishing marginal returns.
c) At which worker (labor) does diminishing returns start? Please explain the reasoning behind your answer.
d) If each taco could be sold for $4 per taco, and each worker is paid $70 per day then, assuming that labor is the only cost of production, how many workers should Mary hire in order to maximize profits? Please explain the reasoning behind your answer.