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    1.5.1 Productivity and Costs Practice Activity

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    stjepan
    The document describes a factory that produces bicycle wheels. It provides a table showing the number of workers needed to produce different levels of output. It asks the reader to calculate key metrics like total variable cost, marginal product, marginal cost, average product and average variable cost. It then asks questions about diminishing returns, the relationships between costs and productivity, and how to plot the short-run cost curves on a graph.

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    1.5.1 Productivity and Costs Practice Activity

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    stjepan
    84 views5 pages
    The document describes a factory that produces bicycle wheels. It provides a table showing the number of workers needed to produce different levels of output. It asks the reader to calculate key metrics like total variable cost, marginal product, marginal cost, average product and average variable cost. It then asks questions about diminishing returns, the relationships between costs and productivity, and how to plot the short-run cost curves on a graph.

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    IB Economics

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    1.5.1_Productivity_and_Costs_practice_activity

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    The document describes a factory that produces bicycle wheels. It provides a table showing the number of workers needed to produce different levels of output. It asks the reader to calculate key metrics like total variable cost, marginal product, marginal cost, average product and average variable cost. It then asks questions about diminishing returns, the relationships between costs and productivity, and how to plot the short-run cost curves on a graph.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    84 views5 pages

    1.5.1 Productivity and Costs Practice Activity

    Uploaded by

    stjepan
    The document describes a factory that produces bicycle wheels. It provides a table showing the number of workers needed to produce different levels of output. It asks the reader to calculate key metrics like total variable cost, marginal product, marginal cost, average product and average variable cost. It then asks questions about diminishing returns, the relationships between costs and productivity, and how to plot the short-run cost curves on a graph.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    Introduction: A factory that manufactures bicycle wheels can produce between 0 and 800 wheels per day,

    depending on how many workers it hires. The factory already owns three wheel building robots (which must be
    operated by workers) and must pay a wage rate of $10 per day to the workers it hires. Assume that the number
    of machines the factory owns and the size of the factory are fixed. Only the number of workers is variable.

    The production table below shows the number of workers needed to produce 0 to 800 wheels per day.

    Task: Calculate the following for the firm as it increases its production from 0 to 800 wheels. Fill in the blank
    boxes in the table below.

    ● Total Variable Cost (TVC): This is the total cost of the variable resource (in this case, labor).
    TVC =¿ of workers × wage rate
    ● Marginal Product (MP): This is the average output of each of the additional workers hired as the firm
    △ Q of output
    increases its output. MP= of workers ¿
    △¿
    ● Marginal Cost (MC): This is the average cost of each additional unit of output as the firm increases its
    △ TVC
    output. MC=
    △ Q of output
    Qof output
    ● Average Product (AP): This is the output per worker. AVC=
    ¿ of workers
    TVC
    ● Average Variable Cost (AVC): This is the labor cost per unit of output. AVC=
    Q of output

    Q (output) # of workers TVC MP MC AP AVC

    0 0 0 - - - -

    100 6

    200 10

    300 13

    400 17

    500 23

    600 32

    700 44

    800 62

    Graph: On the graph below, plot the firm’s Marginal and Average Variable Costs (MC and AVC) and its
    Marginal and Average Products (MP and AP). Notice the dual vertical axis. The ‘C’ values represent the firm’s
    costs and the ‘P’ values represent productivity.
    Questions:
    1. Why does the number of workers needed to produce each additional hundred units change as output
    increases?

    2. Over what range of output do the marginal returns of labor increase? Explain why this happens.

    3. Beyond what level of output does the firm begin experiencing diminishing marginal returns? Explain
    why this happens.

    4. Describe and explain the relationship between marginal product and marginal cost in your graph.
    5. Describe and explain the relationship between average product and average variable cost in your
    graph.

    6. Describe and explain the relationship between MC and AVC.

    7. Are the costs in this graph the firm’s short-run costs or its long-run costs? Explain.

    8. At what level of output is this firm’s average variable costs minimized (at its lowest)?

    9. Besides the wages firms pay their workers, what other costs do firms face?
    10. Assume this firm paid $200 for its machinery and factory space (this is the firm’s Total Fixed Cost).
    ¿
    Calculate the firm’s Average Fixed Cost (AFC) at each level of output. AFC=Total ¿Cost
    Q of output

    AVC
    Q of output AFC (from table ATC
    above)

    0 -

    100

    200

    300

    400

    500

    600

    700

    800

    11. A firm’s Total Costs (TC) is the sum of its Variable Costs and its Fixed Costs. You have determined the
    wheel factory’s Average Variable Costs and its Average Fixed Costs. To find the firm’s Average Total
    Costs (which is the product’s per unit cost), simply add the AVC and the AFC at each level of output.
    Calculate the ATC at each level of output and add it to the table above.
    12. You have now determined all of this firm’s short-run production costs, including its Marginal Cost,
    Average Variable Cost, Average Fixed Cost and Average Total Cost. In the graph below, draw these
    four short-run cost curves together.

    13. If you have done all your calculations and drawn your graph correctly, then you have now completed
    your first graph of a firm’s Short-run Costs of Production. Explain one last time the importance of the
    Law of Diminishing Returns in determining a firm’s short-run production costs.

    14. What other information, besides its production costs, would a firm need to know before determining the
    best level of output.

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