Demonstrates how cost and production analysis aids managers in making decisions that maximize profit. To conduct this analysis, thoroughly review the Background materials, fill in the tables.
The following table gives the total weekly output of bicycles at Al's Bicycle Town.
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Table 1
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Labor
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Total Product (TP)
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Average Product of Labor (AP)
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Marginal Product of Labor (MP)
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0
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0
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n/a
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n/a
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1
|
100
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100
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100
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2
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300
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|
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3
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450
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4
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110
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5
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630
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6
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110
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• Complete this table.
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Table 2
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Labor
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Total Product (TP)
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Total Variable Cost (TVC)
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Total Cost (TC)
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0
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0
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n/a
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4,000
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1
|
100
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2,000
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2
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300
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3
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450
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4
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12,000
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5
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630
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6
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12,000
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• Draw the graphs of the marginal product (MP) and the average product (AP).
• Draw the graphs of the TC and TVC curves. What is the relationship between these two curves?
• Complete Table 3 by using your answers from the previous Tables and calculating the AVC, ATC, and MC.
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Table 3
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Total Product (TP)
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Average Variable Cost (AVC)
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Average Total Cost (ATC)
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Marginal Cost (MC)
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0
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n/a
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n/a
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n/a
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100
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20
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20
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300
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450
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21.43
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630
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66.67
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• Draw the graphs of the ATC, AVC, and MC curves. What is the relationship between the ATC and AVC curves? Between the MC and AVC curves?
• Complete Table 4, which presents production data with the new technology.
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Table 4
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Labor
|
Total Product (TP)
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Average Product of Labor (AP)
|
Marginal Product of Labor (MP)
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0
|
0
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n/a
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n/a
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1
|
120
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120
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120
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2
|
360
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3
|
540
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4
|
672
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5
|
756
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6
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792
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Use the new technology data to complete Tables 5 and 6.
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Table 5
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Labor
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Total Product (TP)
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Total Variable Cost (TVC)
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Total Cost (TC)
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0
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0
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n/a
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1
|
120
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|
|
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2
|
360
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|
|
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3
|
540
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|
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4
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672
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5
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756
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6
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792
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Draw the ATC and MC curves you just entered in Table 5. How do the old and new ATC curves compare? The old and the new MC curves?
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Table 6
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Total Product (TP)
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Average Variable Cost (AVC)
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Average Total Cost (ATC)
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Marginal Cost (MC)
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0
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n/a
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n/a
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n/a
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120
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|
|
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360
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|
|
|
|
540
|
|
|
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672
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|
|
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756
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792
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Return to the old technology data. Suppose that the cost of Al's fixed inputs remains the same at $4,000, but the cost of labor rises. Specifically, suppose that a worker now receives $3,000 per month.
Complete Table 7 for the two missing TP. Copy your answers from Table 1.
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Table 7
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Labor
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Total Product (TP)
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Total Variable Cost (TVC)
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Total Cost (TC)
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0
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0
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n/a
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4,000
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1
|
100
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3,000
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2
|
300
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3
|
450
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4
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16,000
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5
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630
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6
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18,000
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In Table 8 compare the cost before and after the increase.
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Table 8
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Before the Increase
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After the Increase
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TP
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ATC
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MC
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ATC
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MC
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0
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100
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|
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300
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|
|
|
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450
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630
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Last question: How did the rise in variable costs affect the average total cost? The marginal cost?