MANAGERIAL ECONOMICS

PRODUCTION FUNCTION GROUP ACTIVITY

SUBMITTED BY :
GROUP 6:
DAKIS, FRANCHEL G.
DAVID, JERICHO C.
DE DIOS, ANABELLA MARIA
DEANG, AEBRIL
DELA PEÑA, AIREEN MAE
DAVID, JOY CRISTINE D.

SUBMITTED TO:
MRS. RACHEL CUNANAN

Quiz Assignment: 100 pts

Answer what is being asked. You can make your own table to illustrate your
answers . You can do it on your laptop or mobile phone or you can do it on yellow
paper then send or turn in your answers. Use a linear production function
 1. Question : Consider the following inputs table:
LABOR CAPITAL
10 200
15 500
20 800
30 1200
40 1500
50 1800
60 2000
70 2300
80 2500
90 2800

a) Calculate the TP, MP Labor , MP Capital, AP Labor, AP Capital and the MRTS .
ANSWER:

L (Labor) K ( Capital) TP or Q ∆L ∆K ∆Q 𝑀𝑃𝐿 𝑀𝑃𝐾 𝐴𝑃𝐿 𝐴𝑃𝐾 MRTS

0 0 0 0 0 0 0 0 0 0 0
10 200 210 10 200 210 21 1.05 21 1.05 20
15 500 515 5 300 305 61 1.0167 34.33 1.03 60
20 800 820 5 300 305 61 1.0167 41 1.025 60
30 1200 1230 10 400 410 41 1.025 41 1.025 40
40 1500 1540 10 300 310 31 1.033 38.5 1.027 30
50 1800 1850 10 300 310 31 1.033 37 1.028 30
60 2000 2060 10 200 210 21 1.05 34.33 1.03 20
70 2300 2370 10 300 310 31 1.033 33.86 1.03 30
80 2500 2580 10 200 210 21 1.05 32.25 1.032 20
90 2800 2890 10 300 310 31 1.033 32.11 1.032 30

b) Within what ranges do we see increasing returns, decreasing returns and negative
returns?
ANSWER:
The increasing returns begin in the labor ranges of 10-15, 60-70, and 80-90, while the
decreasing returns begin in the labor ranges of 20-40, 50-60, and 70-80. Negative
returns, on the other hand, do not have a visible outcome

c.) Within what range does the DMRTS happens?

ANSWER:
The Diminishing Marginal Rate of Technical Substitution occurs in the following
labor ranges: 20-40, 50-60, and 70-80
 2. Question: Bill and Ted operate a small company that produces souvenir footballs.
Their fixed cost is $2,000 per month. They can hire workers for $1,000 per
worker per month. Their monthly production function for footballs is as given in
the following table:
Quantity of labor (workers) Quantity of footballs
0 0
1 300
2 800
3 1200
4 1400
5 1500

a. For each quantity of labor, calculate average variable cost (AVC), average fixed cost
(AFC), average total cost (ATC), and marginal cost (MC)

Answer: The AVC, AFC, ATC, and MC are given in the table below.
Quantity of Quantity of Fixed Variable Total Cost AVC of AFC of ATC of MC of
labor footballs Cost Cost football football football football
(workers)
0 0 $2,000 - $2,000 - - - -
1 300 $2,000 $1,000 $3,000 $3.33 $6.67 $10.00 $3.33
2 800 $2,000 $2,000 $4,000 $2.50 $2.50 $5.00 $2.00
3 1,200 $2,000 $3,000 $5,000 $2.50 $1.67 $4.17 $2.50
4 1,400 $2,000 $4,000 $6,000 $2.86 $1.43 $4.29 $5.00
5 1,500 $2,000 $5,000 $7,000 $3.33 $1.33 $4.67 $10.00

AVERAGE VARIABLE COST (AVC) AVERAGE FIXED COST (AFC)

Formula: Variable Cost / Quantity Formula: Fixed Cost / Quantity

1,000 / 300 = $3.33 2,000 / 300 = $6.67

2,000 / 800 = $2.5 2,000 / 800 = $2.5
3,000 / 1,200 = $2.5 2,000 / 1,200 = $1.67
4,000 / 1,400 = $2.86 2,000 / 1,400 = $1.43
5,000 / 1,500 = $3.33 2,000 / 1,500 = $1.33

AVERAGE TOTATL COTS(ATC) TOTAL COST (TC)

Formula: Total Cost/ Quantity Formula: Variable Cost + Fixed Cost
0 + 2,000 = $2,000
3,000 / 300 = $10 1,000 + 2,000 = $3,000
4,000 / 800 = $5 2,000 + 2,000 = $4,000
5,000 / 1,200 = $4.17 3,000 + 2,000 = $5,000
6,000 / 1,400 = $4.29 4,000 + 2,000 = $6,000
7,000 / 1,500 = $4.67 5,000 + 2,000 = $7,000
 MARGINAL COST (MC)
Formula: Change in Total Cost / Change in Quantity

3,000 - 2,000 / 300 - 0 = $3.33

4,000 - 3,000 / 800 - 300 = $2
5,000 - 4,000 / 1,200 - 800 = $2.5
6,000 - 5,000 / 1,400 - 1,200 = $5
7,000 - 6,000 / 1,500 - 1,400 = $10

3. Question: The following table shows a car manufacturer’s total cost of producing
cars:

Quantity of cars TC
0 $500,000
1 $540,000
2 $560,000
3 $570,000
4 $590,000
5 $620,000
6 $620,000
7 $720,000
8 $800,000
9 $920,000
10 $1,100,000
a. Calculate the average variable cost (AVC), average total cost (ATC), and average
fixed cost (AFC).
b. For each level of output, calculate this manufacturer’s marginal cost (MC).

ANSWER IN a & b
Quantity of TC FC MC VC AVC ATC AFC
cars (∆TC/∆Q) ( TC- FC ) (VC/Q) ( TC/Q ) ( FC/Q )
0 $500,000 $500,000
1 $540,000 $500,000 $40,000 $40,000 $40,000 $540,000 $500,000
2 $560,000 $500,000 $20,000 $60,000 $30,000 $280,000 $250,000
3 $570,000 $500,000 $10,000 $70,000 $23,333 $190,000 $166,667
4 $590.000 $500,000 $20,000 $90,000 $22,500 $147,500 $125,000
5 $620,000 $500,000 $30,000 $120,000 $24,000 $124,000 $100,000
6 $660,000 $500,000 $40,000 $160,000 $26,667 $110,000 $83,333
7 $720,000 $500,000 $60,000 $220,000 $31,429 $102,857 $71,429
8 $800,000 $500,000 $80,000 $300,000 $37,500 $100,000 $62,500
9 $920,000 $500,000 $120,000 $420,000 $46,667 $102,222 $55,556
10 $1,100,000 $500,000 $180,000 $600,000 $60,000 $110,000 $50,000
 4. Question: Changes in the prices of key commodities can have a significant impact
on a company’s bottom line. According to a September 27, 2007, article in the
Wall Street Journal, “Now, with oil, gas and electricity prices soaring,
companies are beginning to realize that saving energy can translate into
dramatically lower cogs.” Another Wall Street Journal article, dated September
9, 2007, states, Higher grain prices are taking an increasing financial toll.”
Energy Is an input into virtually all types of production; corn is an input into the
production of beef, chicken, high-fructose corn syrup, and ethanol (the gasoline
substitute fuel).

a. Explain how the cost of energy can be both a fixed cost and a variable cost for a
company.
ANSWER:
Energy can be a both fixed and variable cost. It is because, the energy costs of
maintaining office buildings, factories, and stores, which must be maintained
regardless of output, are a fixed cost. Furthermore, energy is a variable cost because
increasing output almost always affects the consumption of more energy.

b. Suppose energy is a fixed cost and energy prices rise. What happens to the
company’s average total cost curve? What happens to its marginal cost curve?
Illustrate your answer with a diagram.
ANSWER:
When fixed costs rise, the average total cost rises as well. The average total cost
curve shifts upward. Panel A of the following graphic represents the movement of the
average total cost curve from its initial position, ATC1, to its new position, ATC. If the
variable costs do not change, the marginal cost curve remains unchanged. As a result,
the marginal cost curve, MC, is still in its initial position.

(a) A Rise in the Price of Energy

Cost of Unit MC
ATC 2
ATC 1

Quantity

c. Explain why the cost of corn is a variable cost but not a fixed cost for an ethanol
producer.
ANSWER:
As the diagram shows, corn is a variable cost because it is utilized as an input in
the ethanol manufacturing. Corn is a variable cost since producing a bigger amount of
ethanol demands a larger quantity of cor n.

(b) A Rise in the Price of Corn

Cost of Unit ATC 2
MC 2
MC 1 ATC 1

Quantity

d. When the cost of corn goes up, what happens to the average total cost curve of an
ethanol producer? What happens to its marginal cost curve? Illustrate your answer
with a diagram.
ANSWER:
As variable costs increase, average total cost and marginal costs increase too.
Both curves will begin to rise or shifts upward. In panel B of the accompanying
diagram, the movement of the average total cost curve is shown by the change from
its initial position, ATC1, to its new position, ATC2. The movement of the marginal
cost curve is represented by the shift from its initial position, MC1, to its new position,
MC2

5. Question: Labor costs represent a large percentage of total costs for many
firms.According to a September 1, 2007, Wall Street Journal article, U.S. labor
costs were up 0.9% during the preceding three months and 0.8% over the three
months preceding those.

a. When labor costs increase, what happens to average total cost and marginal cost?
Consider a case in which labor costs are only variable costs and a case in which they
are both variable and fixed costs.

An increase in labor productivity means each worker can produce more output.
Recent data on productivity show that labor productivity in the U.S. non farm
business sector grew 2% for each of the years 2005, 2006, and 2007. Annual growth
in labor productivity averaged 1.5% from the mid-1970s to mid-1990s, 2.6% in the
past decade, and 4% for a couple of years in the early 2000s.

ANSWER:
Increases in labor expenses raise both the average total cost and the marginal cost
when labor costs are variable and not constant. Whether labor expenses are variable or
fixed, the impact is the same, both the average total cost and the marginal cost rise.
 Practice Questions:
b. When productivity growth is positive, what happens to the total product curve and
the marginal product of labor curve? Illustrate your answer with a diagram.
ANSWER:
Both the marginal cost curve and the average total cost curve will slope upward
when productivity growth is positive, while labor costs stay unchanged. The
accompanying diagram illustrates the shift of the average total cost curve from its
starting point, ATC1, to its new position, ATC2. The change from MC1 to MC2
represents the shift of the marginal cost curve from its initial point, MC1, to its new
location, MC2.

(b) Total Product Curves (a) Marginal Product Curves

Quantity Marginal Product
Of Labor
TP 2
TP 1
MPL 2
MPL 1
Quantity of Labor Quantity of Labor

c. When productivity growth is positive, what happens to the marginal cost curve and
the average total cost curve? Illustrate your answer with a diagram.
ANSWER:
The marginal cost curve and the average total cost curve will both shift downward
when productivity growth is positive while the labor costs remain constant.In the
diagram showed below, The movement of the average total cost curve is represented
by the shifting form its original position, ATC1, to its new position, ATC 2. While the
movement of the marginal cost curve shown the shifting from its original position,
MC1, to its new position, MC2.

Cost of Unit
MC1
MC2
ATC1
ATC2

Quantity

d.) If labor costs are rising over time on average, why would a company want to adopt
equipment and methods that increase labor productivity?
ANSWER:
The average total cost and marginal cost curve will both shift upward when the
labor cost rise. Productivity growth will balance this by shifting the average total
cost and marginal cost curves downward.