John Michael Vincent E. Clarito Prof.

Leonora Signey
BSBA FM 2-6 Basic Microeconomics

Exercise 7
1. Complete the following
Inputs of Labor Total Product Marginal Product Average Product
(TP) (MP) (AP)
0 0
1 15 15 15
2 34 19 17
3 51 17 17
4 65 14 16.25
5 74 9 14.8
6 80 6 13.33
7 83 3 11.86
8 82 -1 10.25

A. Plot the total product, marginal product and average products and explain in detail the
relationship between each pair of curves. Explain why MP first rises, then declines, and
ultimately becomes negative.

TOTAL PRODUCT
90
80 TP
70
Units of Product

60
50
40
30
20
10
0
0 1 2 3 4 5 6 7 8 9
Inputs of Labor
 MARGINAL PRODUCT & AVERAGE PRODUCT
25

20

15 AP
Units of Product

10

5
M
0 P
0 1 2 3 4 5 6 7 8 9

-5
Inputs of Labor

When the Total Product (TP) initially increases at an increasing rate, the Marginal Product
rises. When the Total product starts increasing at a diminishing rate, the Marginal Product stays
positive but in turn starts declining. Once the Total Product finally reaches its maximum and
declines, the Marginal The extra units of labor add a larger and larger amount to TP. Once the
Total Product experience an increase but at a decreasing rate, the Marginal Product remains
positive but starts declining. When the Total Product reaches its maximum and finally declines,
the Marginal product becomes zero and ultimately becomes negative. The Average Product (AP)
exhibit a similar behavior as the Marginal Product. It increases, reaches a maximum, and
eventually decreases. But when the Marginal Product exceeds average product, Average Product
rises and once Marginal Product is less than Average Product, Average Product declines.
The Marginal Product initially rises because the first extra units of labor add a larger and
larger amount to the Total Product. It then declines at certain point, reflecting that each
additional unit of labor now adds less to the total product than did the previous unit. The
Marginal Product then ultimately becomes negative because an additional unit of labor has
become detrimental to the overall production.
2. A firm has Fixed Cost of 60 and Variable Cost as indicated in the table below. Complete the
table.
Total Total Total Average Average Average Marginal
Product Variable Cost Fixed Cost Variable Total Cost Cost
(TP) Cost (TC) (AFC) Cost (ATC) (MC)
(TVC) (AVC)
0 0 60
1 45 105 60 45 105 45
2 85 145 30 42.5 72.5 40
3 120 180 20 40 60 35
4 150 210 15 37.5 52.5 30
5 185 245 12 37 49 35
6 225 285 10 37.5 47.5 40
7 270 330 8.57 38.57 47.14 45
8 325 385 7.5 40.63 48.13 55
9 390 450 6.67 43.33 50 65
10 465 525 6 46.5 52.5 75

A. Graph FC, VC and TC. Explain the behavior or relationship of the curves.

Fixed Cost, Variable Cost, & Total Cost

600

500

400
Cost

300

200

100

0
0 2 4 6 8 10 12
Units of Product

The Fixed Cost (FC) is independent and does not vary with changes in output. In contrast, the
Variable Cost (VC) changes with the level of output. The Total Cost (TC) on the other hand is
the vertical sum of the Fixed Cost and Variable Cost at any output.
B. Graph AFC, AVC, ATC and MC. Explain the behavior or relationship of the curves.

120

100

80

60

40

20

0
0 2 4 6 8 10 12

The Average Fixed Cost (AFC) falls as given amount of fixed costs is divided and allocated over
a larger and larger output but the Average Variable Cost (AVC) only initially falls because of
increasing marginal returns but eventually rises, reflecting that marginal returns are diminishing.
The Average Total Cost (ATC) is simply the vertical sum of AFC and AVC.