Eco 250: Determining Cost of Production Quiz: 04/19/2018 following table indicat

Question

Eco 250: Determining Cost of Production Quiz: 04/19/2018 following table indicates the amounts of labor and capital required to produce one widget using each of the three processes. Assume that a unit of labor cost $3 and that a unit of capital cost $1. Assume that a firm produces widgets and can produce them by relying on any of three processes. The Units of Labor Units of Capital Process A. Which process will the firm employ to produce widgets and explain why (10 points)? Compute Total Cost for the three production proces (18 points) Widgets (Q) 8. ses for the following three levels of output: Process A Process B Process C 10 30 40 Based upon your calculations above and using the least cost process complete the following table (20 points) C. Widgets Marginal Cost Average Total Cost 10 20 30 40

Explanation / Answer

A. For selecting the process that the company will choose we have to find out the minimum cost that will be incurred in each process for producing widgets which is as follows:

So, the total cost incurred in each processes for production of 1 unit is as follows:

Process A: $13

Process B: $11

Process C: $10

As per this calculation the company should select process C as the cost incurred is minimum for producing widget.

B. Computation of total cost for each process at different levels of output is as follows:

C. Using the least cost process method i.e. process C, Marginal cost is the additional cost incurred for the production of an additional unit of output, hence calculation of marginal cost and average total cost at following levels of output is as follows:

Labour Cost Capital Cost Process A 4 * $3 1 * $1 Process B 3 *$3 2 * $1 Process C 2 * $3 4 * $1

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