Before beginning this assignment, make sure you have gone carefully  through all of the required readings for this module.  It is very  important to carefully absorb both the general concepts as well as the  numerical examples in the background readings.  For this assignment, you  will have to answer some purely conceptual questions as well as some  numerical problems.  For conceptual questions, make sure to thoroughly  explain your answers and to cite specific readings from the required  background materials to explain your answers.  For numerical problems,  make sure to show all of your work and explain how you arrived at your  answers (partial credit can be given if you get the final answer wrong  but do some of the steps correctly). Note that you need to use Microsoft  Excel to do the graphs for the numerical problems.

Case Assignment

Part A: Conceptual questions

  1. Suppose you own a television factory and at your current level of  output you have average total cost of $800 per television, average  variable costs of $700 per television, and a marginal cost of $400.  If  the price your buyers are willing to pay is $500, should you decrease or  increase production?  Explain your reasoning, and make sure to cite at  least one of the required readings in your answer.
  2. You are the owner of a restaurant, and currently you have only one  waiter.  While this keeps costs down, many of your customers go home  because they are tired of waiting in line or waiting for their order.   You hire four more waiters and waitresses, and you are now able to serve  a dramatically higher number of customers.  Seeing the huge  productivity gains from hiring more staff, you then hire 20 more waiters  and waitresses.  However, you are not able to serve any more customers  than you were able to when your staff size was only four.  In fact, your  restaurant has become overly crowded because there is not enough room  in your restaurant for all of your staff.  You are confused as to why  hiring four more staff members increased your productivity, but hiring  20 more did not.  What concept from the background readings best  describes what happened in this case?  Explain your reasoning.

Part B: Quantitative problems

The following table gives the total weekly output of bicycles at Al’s Bicycle Town.

Table 1

Labor      Total Product (TP)   Average Product of labor (AP)   Marginal Product of labor (MP)

0               0                                  na                                                     na

1             100                              100                                                   100

2             300                             —–                                                   ___

3             450                             ___                                                    ___

4             ___                             ___                                                    110

5             630                             ___                                                    ___

6             ___                             110                                                    ___

  • Complete this table.
  • Draw the graphs of the marginal product (MP) and the average product (AP).
  • Where do the AP and MP curve cross?

The cost of 1 worker is $2000 per month. Total fixed cost is $4000 per month.

  • Complete Table 2 using your answers from Table 1 and by computing total variable cost (TVC) and total cost(TC).

Table 2

Labor      Total Product (TP)   Total variable cost (TVC)   Total cost (TC)

0               0                                  na                                                  4000

1             100                              2000                                                 ___

2             300                             —–                                                   ___

3             450                             ___                                                    ___

4             ___                             ___                                                    12000

5             630                             ___                                                    ___

6             ___                             12000                                                ___

  • 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.

Table 3 

Total Product (TP) Average variable cost (AVC) Average total cost (ATC)   Marginal cost (MC)

0                                 na                                 na                                           na

100                              20                                ___                                          20

300                             —–                              ___                                         ___

450                             ___                               ___                                         ___

___                             ___                               21.43                                      ___

630                             ___                                ___                                        ___

___                             ___                                ___                                       66.67

  • 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?

Leave a Reply