Question

Farm A is a profit maximizing, perfectly competitive producer of wheat. It produces wheat using 1 acre of land (price = $1,000) and varying inputs of labor (price = $500 per man-month). The production function is as follows:

Number of man-months Output per month

(per month) (truckloads)

0 0

1 1

3 2

7 3

12 4

18 5

25 6

Show that the production of Farm A is subject to increasing marginal costs.

Answer 1

Number of man-months (Per month)	Output per month (truckloads)	Cost of labor	Variable cost	Marginal Cost
0	0	500	0	----
1	1	500	500	500
3	2	500	1500	1000
7	3	500	3500	2000
12	4	500	6000	2500
18	5	500	9000	3000
25	6	500	12500	3500

Cost of each labor per month is $500

Labor is the only variable input.

Variable cost = Number of labor * Labor cost.

Marginal Cost = (Change in Variable cost / Change in number of output)

Above table depicts that as the output increase, the marginal cost also increase.

It means the production of farm A is subject to increasing marginal costs.