Managerial Economics and Globalization – ECO 550
Week 3 Problem Set
- The following table shows data for a simple production function:
- From the information in the table, calculate total fixed costs (TFC), total variable costs (TVC), total cost (TC), average fixed costs (AFC), average variable costs (AVC), average total cost (ATC), and marginal cost (MC). Assume capital costs to this firm is $20 per unit, and labor costs $10 per worker.
- For what range of output does this function have diminishing marginal returns?
- At what output is average product maximized?
- At which level of production is average total cost minimized? At which level of production is average variable cost minimized?
- Jim is considering quitting his job and using his savings to start a small business. He expects that his costs will consist of a lease on the building, inventory, wages for two workers, electricity, and insurance.
- Indentify which costs are explicit and which are opportunity [implicit] costs.
- Identify which costs are fixed and which are variable.
- Suppose that a firm’s only variable input is labor. When 50 workers are used, the average product of labor is 50, and the marginal product of the 50th worker is 75. The wage rate is $80, and the total cost of the fixed input is $500.
- What is average variable cost? Show your calculations.
- What is marginal cost? Show your calculations.
- What is average total cost? Show your calculations.
- Is each of the following statements true or false? Explain your answer.
- Marginal cost is increasing.
- Average variable cost is increasing.
- Average total cost is decreasing.
- Ronda’s Rug Company can produce 50 rugs using the following five combinations of labor and capital:
If the price of capital is $2 per unit and the price of labor is $1 per unit, calculate the total cost of producing 50 rugs under each technology. Which is the cost-minimizing technology?