Assume that a firm has a plant of fixed size and that it can vary its output only by varying the number of workers (labor) it employs. The table below shows the relationship among the number of workers employed and the output of the firm.
Workers Output MP VC AVC MC
15 10 10
17 16 6
19 32 16
22 42 10
27 45 3
1) Find the marginal product (of labor) and explain the pattern you see. Explain which theory is this pattern consistent with, by also stating the period of time in which this theory holds?
2) A worker can be hired for $70 a day. Find AVC (average variable cost) and explain the pattern you see. Try to plot a graph by hand using the data in the output column and the corresponding AVC data on the AVC column.
3) Find the MC (marginal cost) and explain the pattern you see. Try to plot a graph by hand using the data in the output column and the corresponding MC data on the MC column. Summarize the relationships between MC and AVC that you find from (a) the theory and (b) your hand drawn graph.
Hint: You do not need FC to find MC. Because MC represents a change in TC, and the component that brings the change in TC is not FC, the information of FC is not important in finding MC.
4) Explain how you would be able to find the supply curve for this firm from the information in the table. State whether you can find the combinations of price and quantity supplied that represent the supply curve.
5) Explain what approach would you chose to find:
a. the profit maximizing level of output,
b. the cost minimizing level of output,
c. the level of output that results in no surpluses or shortages
What other additional information do you need, and how would you proceed if you had that information?