Chapter 6 : The Production Process : The Behavior of Profit maximizing Firms

Solution to Application Questions:

1.Billy Bob’s revebue is $110,000. His accounting cost is $93,000, as indicated by the table.However ,
he has an opportunity cost too-the $15,000 he could have made teaching. His total (economic ) cost
is $ 108,000. Because his total revenue exceeds his total cos, he should stay in farming. He is earning
an economic profit of $2,000.

2.

a.See the following table. Marginal product of labor is ‘change in total product divided by change in
labor’. For worker 5 ,for instance,change in total product is (44-36) and the change in labor is
one.Average product of labor is ‘total product divided by number of workers’.For 5 workers, for
instance, total product is 44 and the number of workers is five

LABOR TOTAL PRODUCT MARGİNAL PRDOUCT AVERAGE PRODUCT

1 5
2 16
3 27
4 36
5 44
6 51
7 56
8 60
9 63
10 65
5 5.5
11 8.0
11 9.0
9 9.0
8 9.0
7 8.8
5 8.0
4 7.5
3 7.0
2 6.5
3.

a.See the following table

NUMBER OF WORKERS MARGINAL PRODUCT TOTAL PRODUCT AVERAGE 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 hird worker.

c.See the following diagram.(Note that marginal curves are drawn halfway between the quantity
values

18
16
14
12
10
MP
8
AP
6
4
2
0
1 2 3 4 5

4.

a.In each case , Technique b is the less expensive

Technique Q=1 Q=2 Q=3 Q=4

A: $19 32 43 55
B: $15 28 38 53
b.See the following diagram

60

50

40

30
TC
20

10

0
1 2 3 4

c.The marginal cost of increasing production from 1 chair to 2 chairs is $13; from 2 3 it is $10;from 3
to 4 it is $15.