Output (Q)FCVCTCAVCAFCATCMC010001000---11003013030100130302100501502550752031006516521.6733.335515410010020025255035510015025030205050610023033038.3316.675580710032042045.7114.286090
Q2)
a)
WorkersCaps (Q)Labor Cost ()Material Cost ()Variable Cost ()Total Revenue ()Marginal Cost of Caps ()14561685622428011560180602403001
b) It is sensible to operate at a loss with 14 workers because the price is greater than the average variable cost and the firm is minimizing losses because it is covering its variable costs and some part of its fixed costs.
c) It would be better to operate with 15 workers because the average variable cost is constant at 4 and employing one extra labour is resulting in an increase in the output. So as long as the marginal revenue is greater than marginal cost, the firm should keep adding one extra labour.
Q3)
a). There are diminishing returns to labour for 3_workers .
b) Three workers can produce 115 pizzas per day at a total cost of 850.
c) When the second worker is hired, the marginal cost is equal to 150 .
Q4
a) If the firm hires 7 workers, the marginal product is 3.
b) Beginning with the 4th worker, the firm will experience diminishing marginal returns to labour because the marginal product starts to decline.
Q5
a) The long run average cost curve is different from a short run average cost curve in the sense that in the long run, all of the input combinations are flexible and none of the factors is fixed. The basic premise of the short run average cost curve is that at least one factor is fixed and the firm has to cover that fixed cost no matter what, even if it shuts down.
b) The long run average cost curve and the short run average cost curve are related because the long run cost curve is the envelope of the portions of the short run average cost curves and is U-shaped. Each short run curve is tangent to the long run average cost curve and each point of tangency shows the least-cost way of producing a level of output.
Q6
a) I would recommend Tie-Dyed T-shirts to continue production because even though it is incurring a loss of 5, the average revenue is greater than the average variable cost and the firm is minimizing losses. In case of shut down, the firm will have to pay the fixed cost of 10 which is greater than the loss incurred if the firm continues business.
b) Taste Freeze Company should shut down operations because it is not covering its average variable costs and the loss to bear would be 3 which is the average fixed cost. In case of continued operations, Taste Freeze will have to bear the loss of 6 which is more than what the company will have to bear in case of shut down.
Q7
a) It is possible for a firm to maximize profits and yet incur a loss. In a perfect competition the profit maximizing position is where MRMC and if the price is less than ATC but greater than the AVC, the firm is better off to continue production in the short run even though the profit is negative.
b) The firm will be willing to operate at a loss because the variable costs are being covered with revenue and some portion is still left over to apply towards fixed costs. The firm is actually minimizing losses in this situation.
Q8
a) The short run marginal cost curve initially decreases to reflect the productivity of the variable resources employed. This means that each variable resource is adding more to the output than the last one and the firm is experiencing increasing marginal returns. As more variable resource is added, the firm experiences diminishing marginal returns as each extra variable is adding less and less to the total output and thus the marginal cost increases.
b) Marginal cost is the cost of one extra unit. When marginal cost is below average cost, average cost is falling as output increases. When marginal cost intersects average cost, the average cost is at its minimum. As marginal cost starts rising, so does the average cost. Hence marginal cost and average cost have a direct relationship and they follow the same pattern.
Q9
a) Marginal revenue is the revenue generated from selling one extra unit. In a perfect competition, a firm is a price taker and hence cannot change the price. So if one more unit is sold, the firm cannot manoeuvre the price to generate more profit and the total revenue will change by the amount that is equal to the constant price only. Thus the marginal revenue is equal to the price.
b) After hurricane Andrew hit south-eastern USA, the demand for ice surged both in the short run and long run. This is because the water and electricity systems were completely destroyed and ice was used as a means to generate water and became one of the basic necessities. Since the demand shot up, the price also increased drastically since supply could not match demand.
Q10
a) When a firm long run average cost falls as output increases, it is experiencing economies of scale.
b) Diseconomies of scale happen generally when the firm expands and as the output increases, so does the long run average cost.
c) When the long run average cost does not increase or decrease with changes in the firms size, the firm experiences constant returns to scale.