jack owns an auto repair shop, specializing in European cars. With three full-ti
ID: 1242348 • Letter: J
Question
jack owns an auto repair shop, specializing in European cars. With three full-time mechanics, Jack's shop repairs/services 15 cars per week. Each worker is paid $500 per week. By hiring another mechanic, at the same salary, he can increase his weekly output to 20 cars. A fifth mechanic would increase his output to 22, and a sixth one to 23. After hiring the seventh mechanic Jack would see his output drop to 22. a. Calculate Jack's total variable cost (TVC), marginal cost (MC), and average variable cost (AVC) at these four levels of output. b. If the average price that Jack charges for each car he services is $500, how many cars per week should he take in? (Explain) c. Suppose Jack's weekly fixed costs is $1500. Assuming he is a profit maximizer, determine his weekly profit. d. Does Jack's production function exhibit, constant, increasing, or diminishing returns (to labor)?Explanation / Answer
a.
b. he should take 22 cars , as it will revenues of $11,000 , in this case costs will be 2500 as he will have to hire 5 people at $500 each. The profit by selling 22 cars will be 8500. Here i am assuming zero fixed costs.
In this case, he might have sold 23 cars and earned revenues of $11,500, but in this case costs will also increase to 3000, and profit will be same 8500 as in 22 cars. So its better to sell only 22 cars as profits will be same.
c. $7000 (see above point profit is $8500 , then deducting 1500)
d. diminishing returns
Number of Labors production TVC MC AVC 3 15 1500 100.0 4 20 2000 100 100.0 5 22 2500 250 113.6 6 23 3000 500 130.4Related Questions
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