ECON1001 Microeconomics for Business Decisions

Workshop Five Activities (Week Five)

Production and Costs

It is recommended that you print this out so you can hand-draw the diagrams.
That is an effective way of learning about these difficult concepts.

Question One Exercises on short-run costs

a) Assume Scrub-It-Clean is a small contract cleaning firm specialising in

cleaning school classrooms, which measures its output as the number on
classrooms it can clean in any given day (or night). Its fixed costs of
production are equal to $50 per day for the hire of vacuum cleaners and
other cleaning equipment. Calculate Scrub-It-Clean’s average fixed costs
of production and plot its AFC curve on Figure 1. (Hint: AFC at Quantity 0
and Quantity 1 are $50; Quantity 2 is $25, etc.)
Costs ($)

Figure 1 Average fixed cost (AFC) curve

50
45
40
35
0
30

25
20
15
10

b) 0 Explain the shape for the AFC curve for Scrub-It-Clean. Will all firms’ AFC
curves
0 be of similar
5 shape 10
to Scrub-It-Clean’s?
15 Briefly
20 explain why.
25 30
Quantity of Output (Q) (Classroom cleaned per 24 hours)
c) The only variable cost of production faced by Scrub-It-Clean is labour. All
of the cleaning materials (detergent etc) are supplied by the school by
whom they are employed (to keep the exercise simple assume the
schools get the cleaning products from the Education Department free of
charge). Table 1 shows the total number of classrooms Scrub-It-Clean
can clean with different numbers of employees. Complete Table 1.
1
TABLE 1 Total output and marginal product (Note: marginal returns and
marginal physical product are the same concept as marginal product.)
Variable DATA
Number of employees 1 2 3 4 5 6 7
Total output (Q) 10 20 30 40 48 54 58
(Classrooms per day)
Marginal product No
(Addition to total output Q) fill
Average productivity
(Total output divided by number
of employees)

d) From the data in Table 1 explain what happens to marginal product and
average productivity as Scrub-It-Clean employs more staff. What is the
economic law which explains this relationship?

e) Assume Scrub-It-Clean pays each of its employees $20 a day in wages.

Complete Table 2.

TABLE 2 Total and average labour (variable) costs

Variable DATA
Number of employees 1 2 3 4 5 6 7
Total labour costs
(Wage rate ($20) x number of
employees)
Total output (Q) 10 20 30 40 48 54 58
(Number of Classrooms per day)
Average labour (variable) costs
(Total labour costs / total output)

f) What happens to average labour costs as output rises in the short-run?

Why does this come about?

g) Obtain the relevant data from Tables 1 and 2 (above) and complete Table
3.

2
 TABLE 3 Average variable, fixed and total costs of production
Variable DATA
Total output (Q) 10 20 30 40 48 54 58
(Classrooms per day)
Average labour (variable) costs
(Total labour costs / total
output)
Average fixed costs
(Fixed costs of $50/Q)
Average total costs
(ATC = AVC + AFC)

h) Plot the data for AFC, AVC (labour) and ATC on Figure 2 (Remember to
plot costs against quantity of output)
Costs ($)

Figure 2

7
6

5
4
3
2

1
0
0 10 20 30 40 50 60

Quantity of Output (classrooms/day)

3
 i) Use the data on ATC for Scrub-It-Clean in Table 3 to complete Table 4.

Table 4 Calculation of MC
Variable DATA
Total output (Q) 10 20 30 40 48 54 58
(Number of classrooms)
ATC
TC = ATC x Q
MC = Δ TC / ΔQ No fill
MID- POINT QUANTITY No fill

j) Plot the ATC and MC curves on Figure 3.

Figure 3
Costs ($)

0
0 10 20 30 40 50 60

Quantity of Output

4
Question Two Exercises on long-run costs

a) Sketch a long-run average cost curve diagram. Label the main

components and briefly explain what they mean.

b) What is the difference between the concepts of diminishing marginal

returns and diseconomies of scale? Briefly explain what causes
diseconomies of scale.

c) Give some examples of the differences between economies of scale

and economies of scope for the oil refining industry.

End of Workshop Five Activities