The following graph shows the marginal and average product curves for labor, the
ID: 1120141 • Letter: T
Question
The following graph shows the marginal and average product curves for labor, the firm's only variable input. The monthly wage for labor is $2,000. Fixed cost is $120,000
a.At what output does the firm reach minimum average variable cost?
b.What is AVC at its minimum?
c.When the firm uses 60 units of labor, how much output does it produce?
d.When the firm uses 60 units of labor, what is AVC at this level of output?
e.When the firm uses 100 units of labor, what is marginal cost at this level of output?
f.When the firm uses 60 units of labor, what is average total cost at this output?
ARMP 100 6 80 60 40F 20 MP AP 20 40 60 80 100 120 40160 LaborExplanation / Answer
a) AVC is inversely related to AP, i.e., when AP increases, AVC decreases. When AP is maximum, AVC attains its minimum point. at 100 units of labour AP is maximum ( AP=80) So, TP=AP*units of labour. TP=8000
So, at output 8000 the firm reach minimum average variable cost.
b) AVC=80 is minimum because AP=80 is maximum.
c) At 60 units of labor AP=60. so, output =60*60= 3600
d) At 60 units of labor TVC = units of labor*wage.
TVC=60*2,000= 1,20,000
AVC=TVC/Units of labour= 60
e) marginal cost = change in total cost when one more units of labour is employed.
change in total cost= change in variable cost= wage= 2,000
mc= 2,000
f) At 60 units of labor. TVC=1,20,000
TFC=1,20,000
TC=TFC+TVC=1,20,000 +1,20,000 = 2,40,000
ATC=TC/units of labour
ATC= 2,40,000/60= 40,000
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