Question

Assumingthatthepriceoflaboris et labeledExerciserable.xisxtodo w- 10 and the price of capital is r 40, use Table 1 from the Excel sheet labeled Exercise2Table.xlsx to do the following: 1. Complete Table 3 2. If the firm can sell the good being produced at $73 per unit, determine whether the firm should produce and sell 1,2 or 4 units. 3. Complete Table 4 by determining the cheapest way to produce the given amounts of output in Table 4 (using the information you have from Table 1)

Answer 1

1.

TABLE 3

K	L	Q	FC	VC	TC	MC	AFC	AVC	ATC
4	0	1	160	0	160		160	0	160
4	1	1.56	160	10	170	17.85714	102.5641	6.410256	108.9744
4	2	1.83	160	20	180	37.03704	87.43169	10.92896	98.36066
4	3	2.05	160	30	190	45.45455	78.04878	14.63415	92.68293
4	4	2.25	160	40	200	50	71.11111	17.77778	88.88889
4	5	2.43	160	50	210	55.55556	65.84362	20.57613	86.41975
4	6	2.6	160	60	220	58.82353	61.53846	23.07692	84.61538
4	7	2.76	160	70	230	62.5	57.97101	25.36232	83.33333
4	16	4	160	160	320	72.58065	40	40	80
4	32	5.83	160	320	480	87.43169	27.44425	54.88851	82.33276
4	64	9	160	640	800	100.9464	17.77778	71.11111	88.88889

Table calculations:

1. FC is fixed cost or the cost of a fixed factor. In this case, it is capital, and this is fixed at K=4. Then the fixed cost is
   $FC=4r=4\times 40=160$
2. VC is the variable cost or cost of the variable factor. In this case, it is labor. Then the variable cost is
     $VC=wL=10\times L$
3. TC is the total cost of production. It is fixed cost plus variable cost.
4. MC is the marginal cost of production. The marginal cost is the change in the total cost due to one unit change in output. Then if changing the output from Q1 to Q2 increases cost from TC1 to TC2, the marginal cost is
   $MC=\frac{TC_2-TC_1}{Q_2-Q_1}$
5. All the average cost is the cost per unit of output and calculated by dividing the cost by corresponding quantity.

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2.

The firm assuming in competitive setting produce the quantity in equilibrium by equating price with marginal cost. That is at equilibrium P=MC for the firm. From table 3, P=MC occurs for Q=4. At Q=4 the marginal cost is $72.5 and the firms earn profit per marginal unit.

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3.

From table 3 the combination of K and L to produce the said output in column 4 is summarized in the table below

	Q=1		Q=2		Q=4		Q=8			Q=9			Q=16
K	1	4	2	8	1	4	8	12.5	32	9	16	25	9	16	25	49	64
L	4	0	8	0	36	16	32	18	0	36	16	4	100	64	36	4	0
TC	80	160	160	320	400	320	640	680	1280	720	800	1040	1360	1280	1360	2000	2560

Now choosing the least cost combinations from this table the table 4 is

TABLE 4

Q	TC	MC	ATC
0	0
1	80	80	80
2	160	80	80
3
4	320		80
8	640	80	80
9	720	80	80
16	1280	80	80