Essentials of Economics
4th Edition
ISBN: 9781464186653
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Question
Chapter 6, Problem 4P
To determine
Concept Introduction:
Fixed cost: It is a cost which is constant in the short run, it is not related to any change in the production of goods or service, it will be fixed disregarding of an increase or decrease in output.
Variable cost: This cost is directly proportional to the level of output produced, it increases with an increase in output and vice versa.
Here,
- AFC is the average fixed cost.
- AVC is the
average variable cost . - ATC is the average total cost.
Average fixed cost: This is the cost, which is constant for the firm irrespective of the output produced by the firm. So the AFC is a fixed cost per unit produced by the firm. It refers to the total fixed cost divided by the output
Here,
- AFC is the average fixed cost
- TFC is the total fixed cost
- Q is the quantity of output.
Average variable cost: This is not a constant cost for the firm, it changes with a change in the output. Therefore, the AVC is a per unit cost of that variable input. It is calculated as follows:
Here,
- AVC is the average variable cost
- TFC is the total fixed cost
- Q is the quantity of output.
Marginal Product of Labor: It refers to the additional units of output, which is produced by employing an additional unit of labor in the current labor force.
Here,
is the change in quantity. 
is the change in labor. 
is the marginal product of labor.
Expert Solution & Answer
Explanation of Solution
a. Calculation of Marginal product of each worker:
| Quantity of labor | Quantity of floral arrangements | Change in quantity of floral arrangements(A) | Change in quantity of labor(B) | Marginal product of labor |
| 0 | 0 | - | - | - |
| 1 | 5 | 5 | 1 | 5 |
| 2 | 9 | 4 | 1 | 4 |
| 3 | 12 | 3 | 1 | 3 |
| 4 | 14 | 2 | 1 | 2 |
| 5 | 15 | 1 | 1 | 1 |
Conclusion:
Therefore, MPL will decrease.
b. Calculation of Marginal cost of each level of output.
| Quantity of labor | Quantity of floral arrangements | Change in quantity of floral arrangements(C) | Fixed Cost(A) | Variable cost(B) | TC |  D) | MC |
| 0 | 0 | - | 100 | 0 | 100 | 0 | 0 |
| 1 | 5 | 5 | 100 | 50 | 150 | 50 | 10 |
| 2 | 9 | 4 | 100 | 100 | 200 | 50 | 12.5 |
| 3 | 12 | 3 | 100 | 150 | 250 | 50 | 16.67 |
| 4 | 14 | 2 | 100 | 200 | 300 | 50 | 25 |
| 5 | 15 | 1 | 100 | 250 | 350 | 50 | 50 |
- As the number of arrangements increase, the marginal cost per floral arrangement also increases because of the principle of the marginal return.
- Marginal cost falls as the firm increase its output. As more and more labor are hired, it will lead to specialization of their tasks.
- A fall in average fixed cost will lead to a decrease in the total cost and also the marginal cost.
Conclusion:
Therefore, after specialization is achieved, the marginal cost rises.
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A. Opportunity cost
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