Group+2+Cost+Curves

=Group 2: Cost Curves=

Each worker at Gallo's cork factory costs $12 per hour. The cost of each machine is $20 per day regardless of the number of corks produced. Please complete the following table and answer the questions below.


 * Machines || Workers || Quantity Supplied || Marginal Production of Labor || Fixed Cost || Variable Cost || Total Cost || Average Fixed Cost || Average Variable Cost || Average Total Cost || Marginal Cost ||
 * 2 || 0 || 0 || 0 || $40 || $0 || $40 || 0 || 0 || 0 || 0 ||
 * 2 || 1 || 5 || 5 || $40 || $12 || $52 || $8.00 || $2.40 || $10.40 || $2.40 ||
 * 2 || 2 || 10 || 5 || $40 || $24 || $64 || $8.00 || $2.40 || $10.40 || $2.40 ||
 * 2 || 3 || 20 || 10 || $40 || $36 || $76 || $4.00 || $1.20 || $5.20 || $1.20 ||
 * 2 || 4 || 35 || 15 || $40 || $48 || $88 || $2.67 || $0.80 || $3.47 || $0.80 ||
 * 2 || 5 || 55 || 20 || $40 || $60 || $100 || $2.00 || $0.60 || $2.60 || $0.60 ||
 * 2 || 6 || 70 || 15 || $40 || $72 || $112 || $2.67 || $0.80 || $3.47 || $0.80 ||
 * 2 || 7 || 80 || 10 || $40 || $84 || $124 || $4.00 || $1.20 || $5.20 || $1.20 ||

 A. Over what range of workers does labor exhibit diminishing marginal productivity?

The range in that exemplifies diminishing marginal productivity is between 0 and 20 corks produced per hour. This is because between these numeric quantities, the cost to produce this number of corks well exceeds the amount of revenue being brought in. Before a sing cork has even been produced, the factory has already incurred a $40 charge, and it won't be until the factory is producing 15 corks at a $12 dollar change in total cost that the factory will be making more money, and ultimately reducing the burden of their costs.

B. On a well-annotated graph, provide a rough sketch of the firm’s average variable costs (AVC), average fixed costs (AFC), average total costs (ATC), and marginal costs (MC).



C. If cork production is a competitive market and the market price of corks is $0.60, how many corks should the firm produce? How many workers’ should it hire? Illustrate on the graph the firms’ profits from cork production.

With the market price of corks at $0.60 a cork, the firm should produce 55 corks an hour, and, to do so, should hire 5 workers. At this price, the marginal revenue ($0.60) is equal to the marginal cost ($0.60), meaning that the firm is at a profit-maximizing level of output.

In order to find this answer, I had to compare the marginal cost with the marginal revenue at each level of output. Since I had already found the marginal cost for each level of output for the chart (by dividing the change in total cost at each level by the change in quantity), I then had to find the marginal revenue. I first had to find the total revenue by multiplying the quantity of corks produced at each level of production by the market price ($0.60). 5 x 0.6=3, 10 x 0.6=6, 20 x 0.6=12, 35 x 0.6=21, 55 x 0.6=33, 70 x 0.6=42, 80 x 0.6=48 I then had to find the change in total revenue by subtracting the total revenue at one level from the total revenue at the next level up. 6-3=3, 12-6=6, 21-12=9, 33-21=12, 42-33=9, 48-42=6 Having found the change in total revenue, I could then find the marginal revenue by diving the change in revenue by the change in quantity. 3/5=0.6, 6/10=0.6, 9/15=0.6, 12/20=0.6, 9/15=0.6, 6/10=0.6 I then compared these with the marginal cost from the chart and found that at the level of production wherein 55 corks are produced an hour, the marginal revenue and the marginal cost are equal.