Given the following information for Mary’s Taco Shop (TP, AP and MP are measured
ID: 1200159 • Letter: G
Question
Given the following information for Mary’s Taco Shop (TP, AP and MP are measured in tacos):
Labor
(L)
Total Product (tacos)
(TP)
Average Product (tacos)
(AP)
Marginal Product (tacos)
(MP)
0
0
--
--
1
20
2
25
3
50
4
150
5
36
6
200
7
30
8
210
a) Fill in the blanks above. (Round each answer to the nearest taco.)
Please note there are no numbers for MP and AP when output is zero tacos.
b) Define the Law of Diminishing Marginal Returns.
c) At which worker (labor) does Diminishing Returns start? Please explain the reasoning behind your answer.
d) If each taco could be sold for $4 per taco, and each worker is paid $70 per day then, assuming that labor is the only cost of production, how many workers should Mary hire in order to maximize profits? Please explain the reasoning behind your answer.
Labor
(L)
Total Product (tacos)
(TP)
Average Product (tacos)
(AP)
Marginal Product (tacos)
(MP)
0
0
--
--
1
20
2
25
3
50
4
150
5
36
6
200
7
30
8
210
Explanation / Answer
a.
Fill in the blanks
L
TP
AP
MP
0
0
---
---
1
TP0 + MP = 20
TP/L = 20
20
2
AP × L = 50
25
TP – TP1 = 30
3
TP2 + MP = 100
TP/L = 33
50
4
150
TP/L = 37
TP – TP3 = 50
5
AP × L = 180
36
TP – TP4 = 30
6
200
TP/L = 33
TP – TP5 = 20
7
AP × L = 210
30
TP – TP6 = 10
8
210
TP/L = 26
TP – TP7 = 0
b.
Law of diminishing marginal returns: As the input increases in production, marginal output decreases after a certain point of time.
c.
Diminishing return starts from 5th worker, because MP starts decreasing from this point.
d.
Profit = TR – TC
TR = TP × $4
TC = L × $70
Profit table
L
TP
Profit
0
0
0
1
20
$10
2
50
$60
3
100
$190
4
150
$320
5
180
$370
6
200
$380
7
210
$350
8
210
$280
At the L = 6, profit is the highest $380. Therefore, 6 labors should be hired for maximizing profits.
L
TP
AP
MP
0
0
---
---
1
TP0 + MP = 20
TP/L = 20
20
2
AP × L = 50
25
TP – TP1 = 30
3
TP2 + MP = 100
TP/L = 33
50
4
150
TP/L = 37
TP – TP3 = 50
5
AP × L = 180
36
TP – TP4 = 30
6
200
TP/L = 33
TP – TP5 = 20
7
AP × L = 210
30
TP – TP6 = 10
8
210
TP/L = 26
TP – TP7 = 0
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