Question

Table 13-6 Adrian's Premium Chocolates produces boxes of chocolates for its mail order catalogue business. She rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week. There are no implicit costs. Boxes of Chocolates Produced per Week Cost Total Cost Number of Workers 0 Marginal Product of Labor Cost of Factory Workers Inputs 330 150 275 425 1 630 150 2 3 4 5 975 890 950 1,375 1,800

Answer 1

19. The correct option would be

• (b) $150

The cost of room is $150 a week, and cost of labor is $275 per week. Hence, the fixed cost is $150 per week, while variable cost is $275 per unit. For 0 quantity produced, Adrian would not employ any labor, but the fixed cost in this case (since it is not mentioned to be an avoidable one) will be paid, and would amount to $150 in that particular week.

Note that yet the cost of room is given per week, but the payment would not necessarily be per week, it would be per month or year. Also, it is mentioned that the room acts as factory. This refers to the fact that not paying for the room would require relocation of the equipment for just that week. Considering these practical aspects, we may say that the fixed cost is indeed a sunk cost, and is not avoidable.

The table is as below (not necessary for question).

L	Q	MPL	FC	VC	TC
0	0	-	150	0	150
1	330	330	150	275	425
2	630	300	150	550	700
3	780	150	150	825	975
4	890	110	150	1100	1250
5	950	60	150	1375	1525
6	960	10	150	1650	1800

We have
MP,=
, and since change in L is always 1 in this case,
MP = 40
or
MP, = 02-02
. The fixed cost will be $150 for any output. The variable cost would be VC=L*W, and since wage is $275, we have VC=$275*L. The total cost would be TC=VC+FC.

As can be seen, the for Q=0, the total cost is still $150.