CHAPTER 4: PRODUCTION AND COST

Relationships Among Total, Average and Marginal Product

1. When the numbers in the total product column increase at in increasing (decreasing) rate, the numbers in the
marginal product column increase
(decrease). This helps demonstrate increasing (decreasing) marginal productivity as the marginal product represents
the rate of change of the total product.

2. When the marginal product is greater (smaller) than the average product, the average product numbers increase
(decrease).
Ch. 4 Question 1

Use the following information on a hypothetical short-run production function to answer questions a-c.

Units of Labor/Day 5 6 7 8 9
Units of Output/Day 120 140 155 165 168

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 and average variable product of each unit of labor input.
b. Calculate total, average total, average variable, and marginal costs.

Labor Output MP AP TC ATC AVC MC

5 120 -- 24 $600 $5 $0.83 --
6 140 20 23.3 $620 $4.43 $0.86 $1
7 155 15 22.14 $640 $4.13 $0.9 $1.33
8 165 10 20.63 $660 $4 $0.97 $2
9 168 3 18.67 $680 $4.05 $1.07 $6.67

c. Can you tell where diminishing marginal returns sets in?

Diminishing marginal returns sets in at some point prior to the 5th unit of labor. Note that MP is declining for 5-9
units of labor.
Ch4. Question 2

Complete the table below, which represents the production costs for a typical firm. (Round
numbers to the nearest tenth.)

TP TFC TVC TC AFC AVC ATC MC

0 $20 $0 $__ --- --- --- ---
1 ___ 27.5 ___ $__ $__ $__ $27.5
2 ___ 46.8 ___ ___ 23.4 ___ ___
3 ___ 63.3 ___ ___ ___ ___ ___
4 ___ 82.5 ___ 5.0 ___ ___ ___
5 ___ 106.7 126.7 ___ ___ ___ ___
6 ___ 139.7 ___ ___ ___ ___ ___
7 ___ 181 ___ ___ ___ 28.7 ___

At what level of output do diminishing returns set in? How do you know?

Answer:

TP TFC TVC TC AFC AVC ATC MC

0 $20 $0 $20 --- --- --- ---
1 20 27.5 47.5 $20 $27.5 $47.5 $27.5
2 20 46.8 66.8 10 23.4 33.4 19.3
3 20 63.3 83.3 6.7 21.1 27.8 16.5
4 20 82.5 102.5 5 20.6 25.6 19.2
5 20 106.7 126.7 4 21.3 25.3 24.2
6 20 139.7 159.7 3.3 23.3 26.6 33
7 20 181 201 2.9 25.9 28.7 41.3

Diminishing returns set in between 3 units and 4 units of output. This is the point at which marginal costs begin to
increase.

Ch4. Question 3