Economics
Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
Book Icon
Chapter 11, Problem 6P
To determine

Concept Introduction:

Fixed cost: It is a cost which is constant in the short run, it is not related to any change in the production of goods or service, it will be fixed disregarding of an increase or decrease in output.

Variable cost: This cost is directly proportional to the level of output produced, it increases with an increase in output and vice versa.

Average Total Cost: It is also referred as the cost of a single unit, it includes the overall cost, that is the variable cost as well as the fixed cost. A firm should always maintain the price of a product above the ATC, otherwise it will result in loss for the firm. The formula for ATC is:

    Economics, Chapter 11, Problem 6P , additional homework tip  1

Here,
  • AFC is the average fixed cost.
  • AVC is the average variable cost.
  • ATC is the average total cost.

Average fixed cost: This is the cost, which is constant for the firm irrespective of the output produced by the firm. So the AFC is a fixed cost per unit produced by the firm. It refers to the total fixed cost divided by the output

    Economics, Chapter 11, Problem 6P , additional homework tip  2

Here,
  • AFC is the average fixed cost
  • TFC is the total fixed cost
  • Q is the quantity of output.

Average variable cost: This is not a constant cost for the firm, it changes with a change in the output. Therefore, the AVC is a per unit cost of that variable input. It is calculated as follows:

    Economics, Chapter 11, Problem 6P , additional homework tip  3

Here,
  • AVC is the average variable cost
  • TFC is the total fixed cost
  • Q is the quantity of output.

Marginal Product of Labor: It refers to the additional units of output, which is produced by employing an additional unit of labor in the current labor force.

    Economics, Chapter 11, Problem 6P , additional homework tip  4

Here,

  • Economics, Chapter 11, Problem 6P , additional homework tip  5is the change in quantity.
  • Economics, Chapter 11, Problem 6P , additional homework tip  6is the change in labor.
  • Economics, Chapter 11, Problem 6P , additional homework tip  7is the marginal product of labor.

Expert Solution & Answer
Check Mark

Explanation of Solution

a. Calculation of Marginal product of each worker:

    Quantity of laborQuantity of floral arrangementsChange in quantity of floral arrangements(A)Change in quantity of labor(B)Marginal product of laborEconomics, Chapter 11, Problem 6P , additional homework tip  8
    0 0 - - -
    1 5 5 1 5
    2 9 4 1 4
    3 12 3 1 3
    4 14 2 1 2
    5 15 1 1 1

Conclusion:

Therefore, MPL will decrease.

b. Calculation of Marginal cost of each level of output.

    Quantity of laborQuantity of floral arrangementsChange in quantity of floral arrangements(C)Fixed Cost(A)Variable cost(B)TCEconomics, Chapter 11, Problem 6P , additional homework tip  9Economics, Chapter 11, Problem 6P , additional homework tip  10D)MCEconomics, Chapter 11, Problem 6P , additional homework tip  11
    0 0 - 100 0 100 0 0
    1 5 5 100 50 150 50 10
    2 9 4 100 100 200 50 12.5
    3 12 3 100 150 250 50 16.67
    4 14 2 100 200 300 50 25
    5 15 1 100 250 350 50 50
  • As the number of arrangements increase, the marginal cost per floral arrangement also increases because of the principle of the marginal return.
  • Marginal cost falls as the firm increase its output. As more and more labor are hired, it will lead to specialization of their tasks.
  • A fall in average fixed cost will lead to a decrease in the total cost and also the marginal cost.

Conclusion:

Therefore, after specialization is achieved, the marginal cost rises.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education