EC120 Chapter Notes - Chapter 13-14: Marginal Revenue, Average Variable Cost, Average Cost

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14 Dec 2014

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Chapter 13 -14: marginal product, costs, revenue, and profit. We assume that the firm"s goal is to maximize profit. Since labor is usually the most important variable factor in the short run, we usually talk of the average product of labour: ap = tp / l. Ex: a worker who does everything required to manufacture a product. As more workers are added, each can specialize on one task, and marginal product rises. But if there is a fixed amount of physical capital, eventually the marginal product begins to decline (could be negative) Atc curve u-shaped because initially, falling afc pulls atc down, then rising avc pulls. Atc up: fixed cost: do not vary with q produced average fixed cost: afc = fc / q. This is a sunk cost: a cost that has already been committed and cannot be recovered. You must pay them regardless of your choice.

Related Questions

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			20
2		25
3			50
4	150
5		36
6	200
7		30
8	210

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.

lilacmacaw694

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	--					--
6	140
7	155
8	165
9	168

harlequinotter496

The law of eventually diminishing marginal returns: (Points : 1)

a. states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns.
b. is a mathematical theorem that can be logically proved or disproved
c. is the rate at which one input may be substituted for another input in the production process
d. None of the above

The marginal product is defined as: (Points : 1)

a. the ratio of total output to the amount of the variable input used in producing the output
b. the incremental change in total output that can be produced by the use of one more unit of the variable input in the production process
c. the percentage change in output resulting from a given percentage change in the amount of the variable input X employed in the production process with Y
d. None of the above

The rate at which one input X may be substituted for another input Y in a production process, while total output remains constant, is: (Points : 1)

a. the slope of the isoquant curve
b. the marginal rate of technical substitution

c. equal to MPx/MPy

d. all of the above
e. none of the above

Marginal revenue product is: (Points : 1)

a. defined as the amount that an additional unit of the variable input adds to the total revenue
b. equal to the marginal factor cost of the variable factor times the marginal revenue resulting from the increase in output obtained
c. equal to the marginal product of the variable factor times the marginal product resulting from the increase in output obtained
d. a and b
e. a and c

Marginal factor cost is defined as the amount that an additional unit of the variable unit of the variable input adds to ____________. (Points : 1)

a. marginal cost
b. variable cost
c. marginal rate of technical substitution
d. total cost
e. none of the above

In the Cobb-Douglas production function Q=aL^?1.K^?2 ______________. (Points : 1)

a. the marginal product of labor (L) is equal to ?1
b. the average product of labor (L) is equal to ?2
c. if the amount of labor input (L) is increased by 1 percent, then output will increase by ?1 percent
d. a and b
e. a and c