Managerial Economics

Suppose that a firm is currently employing 10 workers, the only variable input, at a wage rate of $100. The average physical product of labor is 25, the last worker added 10 units to total output, and total fixed cost is $5,000.

a. What is marginal cost?
b. What is average variable cost?
c. How much output is being produced?
d. What is the average total cost?
e. Is average variable cost increasing, constant, or decreasing?

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  1. Please let me know if I am on the right track?

    a) The firm paid the last hired worker $100 and he produced 10 units. So, cost of producing the last unit (MC) is 100/10 = $10
    b) The firm hires 10 workers and pays them $100 each, so Total variable costs are 10*100 = 1000. On average, a worker makes 25 units, so total units are 25*30 = 750. So, the average variable cost of producing a unit (AVC) is = 1000/750 = 1.33.
    c) 750 from b)
    d) Total fixed costs are total variable costs (1000) plus total fixed costs (given at $5000). So, TC = 5000+1000 = 6000. Average total costs = TC/Q = 6000/750 =8.
    e) Since the marginal (last) worker added 10 unit and the overall average is 25 units, average variable costs must be rising. If AVC is rising, TVC must also be rising.

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