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.

Average Total Cost: It is also referred as the cost of a single unit, it includes the overall cost, that is the variable cost as well as the fixed cost. A firm should always maintain the price of a product above the ATC, otherwise it will result in loss for the firm. The formula for ATC is:

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.
  

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.