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Answer - Key - Lab - Activities - Micro Econ

Tony operates a pizza plant and hires workers. The summary is: 1) Tony's production function shows output levels for different plants with varying labor and oven amounts. Tony can increase efficiency by matching labor and equipment to the optimal output level. 2) Tony's costs include wages, fixed costs, and variable costs that change with output. Marginal cost rises as more labor is hired, showing diminishing returns. 3) Average and marginal costs are related, with average cost minimized when marginal cost equals average cost. Tony should produce where marginal cost equals the market price to maximize profits.

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488 views3 pages

Answer - Key - Lab - Activities - Micro Econ

Tony operates a pizza plant and hires workers. The summary is: 1) Tony's production function shows output levels for different plants with varying labor and oven amounts. Tony can increase efficiency by matching labor and equipment to the optimal output level. 2) Tony's costs include wages, fixed costs, and variable costs that change with output. Marginal cost rises as more labor is hired, showing diminishing returns. 3) Average and marginal costs are related, with average cost minimized when marginal cost equals average cost. Tony should produce where marginal cost equals the market price to maximize profits.

Uploaded by

Ally Triz
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Answers for the Lab Activities – 02/12

Output (pizzas per day)


Labor
(workers) Plant 1 Plant 2 Plant 3 Plant 4
1 8 11 13 14
2 18 22 24 25
3 26 30 33 35
4 31 36 40 43
5 34 40 45 50
6 35 42 48 54
7 33 40 47 54
Ovens 1 2 3 4

1) Tony's Pizza's production function is shown in the table above.

a) Suppose Tony operates Plant 2. He hires 2 workers and produces 20 pizzas a day. Is the
pizzeria technologically efficient? Why or why not?

The firm is not technologically efficient. The production function shows that with 2
ovens and 2 workers it is possible to produce 22 pizzas a day.

b) Suppose Tony operates Plant 1. He hires 2 workers and produces 18 pizzas per day. Is
Tony's Pizza technologically efficient? Why or why not? Can Tony increase production
to 22 pizzas a day in the short run? If yes, how?

Tony's Pizza is technologically efficient. The production function shows that 18 pizzas is
the maximum output that 2 workers can produce with 1 oven. Tony can increase
production to 22 pizzas per day in the short run by hiring more labor.

c) Suppose Tony operates Plant 3. What is the marginal product of labor when the fourth
worker is hired? When operating Plant 3, does Tony experience diminishing marginal
returns? Explain.

When the 4th worker is hired, the marginal product of labor is the change in output, 40
pizzas - 33 pizzas = 7 pizzas, divided by the change in the labor input, 1 worker. So the
marginal product of labor for the 4th worker is 7 pizzas per day. Tony experiences
diminishing marginal returns because the marginal product of labor diminishes as more
workers are hired.

d) Suppose Tony currently uses Plant 3. Can he increase production from 40 to 50 pizzas
per day in the short run? In the long run? If yes, how?

If Tony uses Plant 3, he cannot increase production from 40 to 50 pizzas per day in the
short run. The short-run production function for Plant 3 shows that the maximum output
that the firm can produce with this plant is 48 pizzas per day. In the long run, however,
Tony can increase his output to 50 pizzas per day by increasing his plant size to 4 ovens
(Plant 4) and hiring 5 workers.

2) Tony's Pizza's production function is shown in the table above. Tony currently operates Plant
1. He hires workers at a wage rate of $50 a day and his total fixed cost is $100.

a) Calculate Tony's Pizza's total variable cost and total cost for each output level.

See the table below.

b) Calculate Tony's marginal costs.

See the table below.

c) Calculate the average fixed costs, average variable costs, and average total costs.

See the table below.

Output TVC TC MC AFC AVC ATC


Labor
(pizzas (dollars (dollars (dollars (dollars (dollars (dollars
(workers)
per day) per day) per day) per day) per day) per day) per day)
0 0 0 100
6.25
1 8 50 150 12.50 6.25 18.75
5.00
2 18 100 200 5.56 5.56 11.11
6.25
3 26 150 250 3.85 5.77 9.62
10.00
4 31 200 300 3.23 6.45 9.68
16.67
5 34 250 350 2.94 7.35 10.29
50.00
6 35 300 400 2.86 8.57 11.43
d) Draw Tony's marginal, average variable, and average total cost curves in one figure.
What is the relationship between marginal cost and average cost?

The figure above has the cost curves. The marginal cost curve intersects both the average
total cost and the average variable cost curves at the minimum point on each curve. When
the marginal cost is below the average cost, the average cost is decreasing. When the
marginal cost is above the average cost, the average cost is increasing. Because ATC =
AFC + AVC, it is the case that AFC = ATC - AVC, so that the average fixed cost is the
vertical distance between the ATC and AVC curves.

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