Managerial Economics Managerial Economics Short-Run ProductionShort-Run ProductionSuppose that a firm is currently employing 20 workers, the only variable input, at a wage rate of $60. The average product of labor is 30, the last worker added 12 units to total output, and total fixed cost is $3,600. a.What is marginal cost? b.What is average variable cost? c.How much output is being produced? d.What is average total cost? e.Is average variable cost increasing, constant, or decreasing? What about average total cost?

Dr. C. Chen

Managerial Economics Managerial Economics Short-Run ProductionShort-Run ProductionSuppose that a firm is currently employing 20 workers, the only variable input, at a wage rate of $60. The average product of labor is 30, the last worker added 12 units to total output, and total fixed cost is $3,600. a. What is marginal cost? The last worker (hired at the wage of $60, TC=$60) added 12 units of output (Q =12) MC=TC/ Q = $60/12=$5b. What is average variable cost? AVC = VC/Q = $60*20/30*20 = $2

Dr. C. Chen

Managerial Economics Managerial Economics Short-Run ProductionShort-Run ProductionSuppose that a firm is currently employing 20 workers, the only variable input, at a wage rate of $60. The average product of labor is 30, the last worker added 12 units to total output, and total fixed cost is $3,600. c. How much output is being produced? Q = 30*20 = 600d. What is average total cost? ATC= TC/Q = (FC+VC)/Q = ($3,600+$60*20)/600 =$8

Dr. C. Chen

Managerial Economics Managerial Economics Short-Run ProductionShort-Run ProductionSuppose that a firm is currently employing 20 workers, the only variable input, at a wage rate of $60. The average product of labor is 30, the last worker added 12 units to total output, and total fixed cost is $3,600. e. Is average variable cost increasing, constant, or decreasing? What about average total cost?From the previous answers, we know that ATC ($8) > MC ($5) > AVC ($2). So, AVC is increasing but ATC is decreasing. On the next slide, ATC > MC > AVC occurs between Q2 and Q3. Dr. C. Chen

8-5

Short Run Average & Marginal Cost Short Run Average & Marginal Cost Curves Curves (Figure 8.5)(Figure 8.5)