2900111 ECONOMICS I
Homework 7
The following questions are based on Week 11 lecture material and Chapter 13.
1. Based on the information in the graph
to the right, calculate values for the Costs
($/unit) MC
following at an output level of 1000 ATC
units/week:
a. Marginal cost $60 AVC
b. Total cost
$30
c. Variable cost
$15
d. Fixed cost 1000 Quantity
(units/week)
2. Jim is a cabinet-maker who makes high-quality coffee tables. In his workshop, he has a circular
saw, a drill-press, a belt-sander and a wood-turning lathe. Working alone, he can make six (6)
tables per week. He can make more tables by hiring workers at a cost of $500/week per worker,
but it takes months to import the industrial-grade equipment necessary for high-quality furniture
making. He has fixed costs of $1000 per week and non-labour variable costs 1 of $200 per table.
a. Calculate the short run marginal product of labour (MPL, third column of table over page).
What term do we use to refer to the short run relationship between the number of workers
and the level of output? What defines how long the “short run” is for Jim?
b. Plot the total output and marginal product of labour (MPL) for Jim’s workshop. 2
Why do you think the first four workers have increasing MPL?
Why do you think subsequent workers have decreasing MPL?
c. If the wage for wood workers is $500/week, complete the variable and total costs columns
(columns 4 through 8) in table over page. Why should Jim include a wage of at least
$500/week for himself (the first worker in the table)?
d. Calculate the marginal cost of output column (MC), the average fixed cost (AFC), average
variable cost (AVC) and average total cost (ATC) – columns 9 through 12 in table over page. 3
1
These non-labour variable costs include the cost of wood, glue and varnish used in making the tables.
2
For the output chart, put the quantity of workers on the horizontal axis and output of tables on the vertical
axis. For the marginal product chart, put the quantity of workers on the horizontal axis and the marginal product
on the vertical axis.
3
A non-programmable calculator will be handy for such questions in the exam.
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e. On the same set of axes (on next page), plot MC, AFC, AVC and ATC. What do you notice
about the intersection of the MC and ATC curve? Give some intuition why this is the case.
f. Suppose the market price for coffee tables is $300. How many tables should Jim make?
How many workers must he hire to do this?
g. If the market price of coffee tables rose to $325, how many tables should Jim make?
How many workers must he hire to do this?
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Jim’s Short-run Production and Cost Table
1 2 3 4 5 6 7 8 9 10 11 12
Quantity Output Marginal Total Variable Costs Total Marginal Average Average Average
of workers (tables/wk) Product Fixed Non-labour Labour Total Cost Cost Fixed Variable Total
(incl. Jack) of Labour Cost V.C. of Output (=∆TC/∆Q) Cost Cost Cost
(L) (Q) (MPL = ∆Q/∆L) (FC) (NLVC) (LVC) (VC) (TC) (MC) (AFC) (AVC) (ATC)
0 0 - $1,000 $0 $0 $0 $1,000 - - - -
1 6 6 $1,000 $1,200 $500 $1,700 $2,700 $283 $167 $283 $450
2 16 10 $1,000 $3,200 $1,000 $4,200 $5,200 $250 $63 $263 $325
3 30
4 46
5 54
6 60
7 65
8 69
9 72
10 74
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Cost Jim's Short-term Production Costs
($/table)
600
500
400
300
200
100
25
2 10 20 30 40 50 60 70 Quantity
(tables/week)
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