Question

 Assume the price of labour is $5.00 and the price of capital is $10.00 and the firm's fixed costs are $15. What production technique will be used to produce the first unit of output? The second? The third? What are the firm's total variable costs, total costs, and marginal costs of producing one unit of output? Two units of output? Three units of output?

Answer 1

 The first unit of output will be produced using batch production, which is used for a lower volume of output.

A continuous production technique will produce 2nd and 3rd output. This is the production method under which materials are processed without interruption.

At First output, 1 labour will be employed, and variable cost will be $5, fixed cost will be $15 at 1st output, and the total cost will be $5 + $15 = Variable cost + fixed cost = $20.

Marginal cost at first output = Total cost at output 1 - Total cost at output 0 = $20 - $15 = $5.

( Total cost at output 0 will only include fixed cost i.e $15 as 0 labour is employed this variable cost will be 0. Total cost at output 0 = $15 + $0 = $15 )

At 2nd output, 2 workers in labour will be employed thus total variable cost will be $5 × 2 = $10 and fixed cost will be same that is $15. Thus Total cost will $10 + $15 = $25 . Similarly Marginal cost will be Total cost at 2nd output - Total cost at 1st output = $25 - $ 20 = $5

At 3rd output, 3 workers in labour will be employed; thus, the total variable cost will be $5 × 3 = $15 and fixed cost will be the same that is $15. Thus Total cost will $15 + $15 = $30 . Similarly Marginal cost will be Total cost at 3rd output - Total cost at 2nd output = $30 - $ 25 = $5

( It is assumed that price of capital is fixed. In the short term, only labour is a variable factor. )

Hence, the production methods used to produce output 1, 2 and 3, the variable cost, total cost, and Marginal cost.