Each unit of input, X, costs $10. Fixed costs are $50, regardless of the level o
ID: 1188742 • Letter: E
Question
Each unit of input, X, costs $10. Fixed costs are $50, regardless of the level of output.
a.Complete the table below.
Labor, X
Total
Output (TPP)
Marginal
Physical
Product (MPP)
TFC
TVC
TC
AFC
AVC
ATC
MC/unit
0
0
1
15
2
45
3
70
4
90
5
105
6
110
7
112
b.If the product can be sold for $0.75 per unit, what is the optimal level of output?
C. Find the level of profit at the optimal level of output. Explain what would happen if the firm produced one more unit of output in terms of marginal cost and marginal revenue.
Labor, X
Total
Output (TPP)
Marginal
Physical
Product (MPP)
TFC
TVC
TC
AFC
AVC
ATC
MC/unit
0
0
1
15
2
45
3
70
4
90
5
105
6
110
7
112
Explanation / Answer
Here, let us first describe the variables that we need to calculate in the given table.
1. MPP: It is the change in the TPP due to 1 extra unit use of labor. That is, the contribution of the last unit of labor into the production process is known as the MPP. So, we can write,
MPP = (Change in TPP) / (Change in the level of labor use)
2. TFC: It is the total fixed cost incurred by any firm in the production process. It has nothing to do with the level of output, as it remains fixed whatever be the level of output. In our analysis, the TFC is $50 and is fixed, irrespective of the level of output and so irrespective of the amount of labor use.
3. TVC: It is the variable cost that changes with the level of output. That is, if we increase the use of labor, the TVC will increase as the total amount of wage given to the labor rises.
4. TC: It’s the total cost that a firm incurs in the production process and it consists of both TFC and TVC. That is we can write, TC = TFC + TVC.
5. AFC: It is the average fixed cost that depends upon the level of output produced and it is the TFC that the firm incurs for per unit of output produced. The formula for AFC is, AFC = TFC/TPP.
6. AVC: It is the average variable cost that the firm incurs and is calculated as the TVC for per unit output. The formula is, AVC = TVC/TPP.
7. ATC: It is the total average cost incurred by a firm and can be calculated as, ATC = AFC + AVC.
8. MC: It is the change in the TC due to 1 unit change in the level of output. That is, the cost incurred by the firm for the last unit of output produced. So, we can write,
MC = (Change in TC) / (Change in TPP)
a. Now, we can calculate the values of the above variables and complete the table as follows—
Labor (X)
Total Output (TPP)
Marginal Physical Product (MPP)
TFC
TVC
TC = TFC + TVC
AFC = TFC/TPP
AVC = TVC/TPP
ATC = AFC + AVC
MC
0
0
-
50
-
50
-
-
-
-
1
15
15
50
10
60
3.33
0.67
4
0.67
2
45
30
50
20
70
1.11
0.44
1.55
0.33
3
70
25
50
30
80
0.71
0.43
1.14
0.4
4
90
20
50
40
90
0.56
0.44
1
0.5
5
105
15
50
50
100
0.48
0.48
0.96
0.67
6
110
5
50
60
110
0.46
0.55
1.01
2
7
112
2
50
70
120
0.45
0.63
1.08
5
b. If the price of the product is $0.75 per unit, then the optimum level of output will be that one where the marginal revenue of the firm would get equated with the marginal cost incurred by the firm.
Now, to find out the marginal revenue, we first need to find out the total revenue earned by the firm by selling different level of outputs. The total revenue (TR) is the total value of the products sold and can be calculated by the following formula—
TR = Price * Total Output
= $0.75 * TPP
And we can calculate the Marginal Revenue (MR) [which describes the extra TR that the firm gets by selling one extra unit of output] can be calculated using the following formula—
MR = (Change in TR) / (Change in TPP)
So, we can calculate the TR in the following table—
Price (in $)
Total Output (TPP)
TR = $0.75 * TPP
MR
0.75
0
0
-
0.75
15
11.25
0.75
0.75
45
33.75
0.75
0.75
70
52.5
0.75
0.75
90
67.5
0.75
0.75
105
78.75
0.75
0.75
110
82.5
0.75
0.75
112
84
0.75
We also could have argued that as the price level remains fixed, the firm will be operating at a perfectly competitive market and the firm will reach the equilibrium when the price of the product gets equated with the marginal cost of the firm. That is at the optimum level we’ll have, Price = MR = MC.
The optimum output will be between 105 and 110.
Labor (X)
Total Output (TPP)
Marginal Physical Product (MPP)
TFC
TVC
TC = TFC + TVC
AFC = TFC/TPP
AVC = TVC/TPP
ATC = AFC + AVC
MC
0
0
-
50
-
50
-
-
-
-
1
15
15
50
10
60
3.33
0.67
4
0.67
2
45
30
50
20
70
1.11
0.44
1.55
0.33
3
70
25
50
30
80
0.71
0.43
1.14
0.4
4
90
20
50
40
90
0.56
0.44
1
0.5
5
105
15
50
50
100
0.48
0.48
0.96
0.67
6
110
5
50
60
110
0.46
0.55
1.01
2
7
112
2
50
70
120
0.45
0.63
1.08
5
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.