Assume that a perfectly competitive firm produces widgets and can produce them u

Question

Assume that a perfectly competitive firm produces widgets and can produce them using any of three processes. The following table indicates the amounts of labor and capital required by each process to produce one widget.

Process A: Units of labor- 4 Units of capital- 1

Process B: Units of labor- 2 Units of capital- 2

Process C: Units of labor- 1 Units of capital- 1

a.) Assuming that capital costs $3 per unit and that labor cost $1 per unit, which of the three processes will the perfect competitor employ and why?

b.) Plot the three Total Variable Cost for the selected production processes for Q= 10, Q= 30 and Q= 50.

c.) At each of the levels of output, determine the number of units of labor and Capital employed.

d.) Compute the following:

Q= 10 TFC TVC MC

Q= 30 TFC TVC MC

Q= 40 TFC TVC MC

Explanation / Answer

a. choosing process C is better here, which cost less expenditure to the producer. here the cost of production will becomes as 1 unit labor + 1 unit capital= $3+1= $4, but in the two remaining alternatives the cost will be higher than this one.

b. at Q 10 the total cost is= 10*4= $40, here there is no fixed cost, so all this should be considered as variale cost only. and the marginal cost of each product is $4 only at each level of production.

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