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) THE COMPETITOR WILL EMPLOY PROCESS C WHICH HAS THE LEAST COST REQUIREMENT. OVER HERE HE WILL HAVE TO PAY ONLY $1 IN FIXED COST AND $3 PER UNIT OF OUTPUT.

B) TVC FOR THE TREE PRODUCTION QUANTITIES ARE Q10 = 10*3 = 30. Q30 = 30*3 = 90 Q50 = 50*3 = 150

C) THE CAPITAL IS A FIXED FACTOR AND WILL REMAIN THE SAME AT ALL LEVELS. AND SINCE 1 LABOR IS REQUIRED FOR ONE UNIT SO THE LABOR AT VARIOUS LEVELS WILL BE Q10 = 10 LABOR. Q30 = 30 LABOR. Q50 = 50 LABOR.

D) Q10 = 1 + 10 = 11 TFC AND $10 TVC.

Q30 = 1 + 30 = 31 TFC AND $30 TVC

Q40 = 1 + 40 = 41 TFC AND $40 TVC

MARGINAL COST CANNOT BE CALCULATED FOR MULTIPLE UNITS. HOWEVER IN CASE OF PERFECT COMPETITION MC = AC.   

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