BECO201: The Production Process– TUTORIAL6 - Solutions

Problem 1

Use the following table for this question.

Number of Workers Marginal Product Total Product Average Product

1 12
2 16
3 14
4 13
5 10

(a) Complete the total product and average product columns.

(b) With which worker do diminishing returns occur?
(c) Graph the marginal and average product curves.

16
14
12
10

0
1 2 3 4 5 6 L

Solutions:
Refer to the following table.

Number of Marginal Total Average

Workers Product Product Product
1 12 12 12
2 16 28 14
3 14 42 14
4 13 55 13.75
5 10 65 13

(b) Diminishing returns set in with the third worker.

(c) Refer to the following diagram. [Note that marginal curves are drawn halfway
between the quantity values.]
 16
14
AP
12
10 MP

0
1 2 3 4 5 6 L
Units of labor

Problem 2
The following example gives some practice in working out which input mix is the most
desirable.

Output Mix 1 Mix 2 Mix 3

K L K L K L
11 7 2 4 4 2 7
12 8 4 6 6 3 8
13 9 6 8 8 4 13
14 12 8 10 10 5 19
15 15 10 12 12 6 25
16 21 12 14 14 7 31

(a) Which input mix will be chosen if the firm wishes to produce 11 units of output,
the price of capital is $4 per unit, and the price of labor is $2 per unit?
(b) Will this mix still be cheapest if the per-unit input prices change to $3 for capital
and $3 for labor?
(c) Will this mix still be cheapest if the per-unit input prices change to $2 for capital
and $4 for labor?

Solutions:
(a) Mix 3, with a total cost of (2 ´ $4) + (7 ´ $2) = $22
(b) Mix 2, with a total cost of (4 ´ $3) + (4 ´ $3) = $24
(c) Mix 1, with a total cost of (7 ´ $2) + (2 ´ $4) = $22

Problem 3
A firm sells 150 units of output at a price of $8 each. The economic cost of producing
the 150 units of output is $1,000. Calculate the firm's level of economic profit.

Solutions:

Profit =$200
Problem 4
A lawyer quits his job at a top legal firm where he was making $100,000 per year. He
was just informed that his late aunt has bequeathed to him $1 million in cash. He
decides to use all of the money to open and run his own hardware store. Assume at
the end of the first year of business that his accountant has informed him that he
earned a $90,000 accounting profit. Why would an economist not be quite as
impressed? Explain.

Solutions:
An economist would not be impressed because he has not taken into account all
his opportunity cost. The first one of course is the $100,000 that he could have
been earning had not quit the law firm. That puts him $10,000 in the red right
out of the starting gate. The second one of course is the forgone interest that
could have been earned from the $1 million that could have been invested
elsewhere. In short the economist would conclude that he has made a loss.

Problem 5
As a manager of a fast-food restaurant, you estimate that the total product of labor
used to make meals varies according to the following data. Calculate APL and MPL:

Total Product of Labor

Number of
Workers (per day) (meals per day) APL MPL
0 0 ---- ----
1 30
2 70
3 100
4 120
5 130
Solutions:

Total Product of Labor

Number of
Workers (per day) (meals per day) APL MPL
0 0 ---- ----
1 30 30 30
2 70 35 40
3 100 33.3 30
4 120 30 20
5 130 26 10

Multiple Choice Questions

Use the following information for the next two questions. Amos can sell as many sandwiches
as he wishes at the market price of $2.00 each. Total cost to Amos of making each sandwich
to market is 50¢. He chooses to sell 10 sandwiches.

1. His total revenue is

(a) $1.50.
(b) $2.00.
(c) $15.00.
(d) $20.00.
ANSWER: (d) Total revenue is price ´ quantity
2. Amos is making
(a) a total economic profit of $15.00.
(b) a total economic profit of $20.00.
(c) a normal rate of return of 10%.
(d) a total economic profit of $1.50.
ANSWER: (a) Total economic profit is total revenue less total cost. For Amos, total
revenue is $20.00 and total cost is $5.00.

3. In the short run

(a) firms may leave the industry.
(b) firms may enter the industry.
(c) there are no fixed resources.
(d) at least one resource is fixed.
ANSWER: (d) In the long run, all resources (and costs) can be altered.
Use the following table to answer the next five questions.

Labor (Workers) Total Product Marginal Product Average Product

0 0 — —
1 15
2 32
3 48
4 60
5 10
6 13

5. Total product, if six workers are employed, is

(a) 70 units of output.
(b) 73 units of output.
(c) 78 units of output.
(d) 86 units of output.
ANSWER: (c) Total product is average product times the number of workers (13 ´
6).

6. Average product, if five workers are employed, is

(a) 10 units of output.
(b) 12 units of output.
(c) 14 units of output.
(d) 15 units of output.
ANSWER: (c) With four workers, total product is 60 units. The fifth worker adds 10
more units to make a total of 70. Average product is total product
divided by the number of workers (70/5).

7. Diminishing returns set in with the            worker.

(a) first
(b) second
(c) third
(d) fourth
ANSWER: (c) The marginal products of the first, second, and third workers,
respectively, are 15, 17, and 16. The decline begins with the third
worker.

8. Average product begins to decrease with the            worker.

(a) first
(b) second
(c) third
(d) fourth
ANSWER: (d) The average products of the first, second, third, and fourth workers,
respectively, are 15, 16, 16, and 15. The decline begins with the
fourth worker.

9. The marginal product of the sixth worker is

(a) 8 units of output.
(b) 13 units of output.
(c) 14 units of output.
(d) 78 units of output.
ANSWER: (a) Total product of five workers is 70. Total product of six workers is 78. The
sixth worker adds 8 units of output

10. When marginal product is decreasing, average product is

(a) decreasing.
(b) increasing.
(c) negative.
(d) None of the above
ANSWER: (d) Average product may be increasing or decreasing but, without
additional information, we can’t say for certain.

Use the following information for the next four questions. Each technology produces the same
amount of output.

Technology Units of Capital Units of Labor

A 2 15
B 5 8
C 9 3
D 14 1

11. The price of both labor and capital is $1 per unit. Which is the optimal production
technique?
(a) A
(b) B
(c) C
(d) D
ANSWER: (c) Technique C is best (least-cost). The total cost is $12.

12. If the price of labor remains at $1 per unit and the price of capital rises to $10 per unit,
which is the optimal production technique?
(a) A
(b) B
(c) C
(d) D
ANSWER: (a) The total cost is $35. The next best is B with a total cost of $58.

13. If the price of capital is $1 per unit and the price of labor is $5 per unit, which is the
optimal production technique?
(a) A
(b) B
(c) C
(d) D
ANSWER: (d) The total cost is $19. The next best is C with a total cost of $24.

14. Which production technique is the most labor intensive?

(a) A
(b) B
(c) C
(d) D
ANSWER: (a) Technique A uses more units of labor than any of the others
15. When marginal product is zero, total product is            and average product is            .
(a) maximized; maximized
(b) maximized; decreasing
(c) decreasing; maximized
(d) decreasing; decreasing
ANSWER: (b)

16. Profit is equal to

A) marginal revenue minus marginal cost.
B) total revenue divided by total cost.
C) total revenue minus total cost.
D) total revenue divided by marginal revenue.
Answer: C

17. In the short run, a firm

A) has at least one fixed factor of production.
B) cannot enter an industry where positive profits are being earned.
C) can exit an industry, and all of its factors of production are variable.
D) both A and B are correct.
Answer: D

18. In the long run, a firm

A) can shut down, but it cannot exit the industry.
B) has no fixed factors of production.
C) can vary all inputs, but it cannot change the mix of inputs it uses.
D) must make positive economic profits.
Answer: B

19. To determine the optimal method of production for a good or service, a firm needs
to know
A) the market price of output.
B) the technologies of production that are available to the firm.
C) the prices of inputs.
D) All of the above are correct.
Answer: D

Refer to the information provided in Figure 7.5 below to answer the question that
follows.
 Figure 7.5

20. Refer to Figure 7.5. Increasing returns continue until the ________ worker is
hired.
A) first
B) fifth
C) eighth
D) sixteenth
Answer: B

21. If the marginal product of labor is greater than the average product of labor, then
the
A) marginal product must be increasing.
B) average product must be increasing.
C) marginal product must be decreasing.
D) average product must be decreasing.
Answer: B

22. The version of the law of diminishing returns that applies to production
A) applies only in the long run.
B) applies only in the short run.
C) is true only when all inputs are variable.
D) applies in the short and long run.
Answer: B