Lecture 4 Practice Question Answers

Note: In most of these problems, the key to finding some answers is to use other answers
that you’ve already found. For instance, before you can find the value of MC, you may
have to find TC first. Sometimes you can’t fill in the blanks in order they appear --
instead, you have to fill in later blanks, and then work backward. If you haven’t tried this
approach, I encourage you to try again before looking at the answers below.

From Browning and Zupan:

7.1. This is the table from the book, except I have used my owns symbols for the column
headings. I have followed the book in letting the marginal product of labor (MPL)
appear on the next row instead of between rows; for example, the MPL between L =
2 and L = 3 is shown on the line for L = 3. (But in the tables for the extra problems
later, I show the marginal values in between rows, as in class).

L q APL MPL
0 0 -- --
1 75 75 75
2 200 100 125
3 300 100 100
4 380 95 80
5 430 86 50
6 450 75 20

Find the first missing APL by dividing q by L: 75/1 = 75.

Find the first MPL by dividing q by L: (75 - 0)/(1 - 0) = 75.
Find the first missing q using the formula q/L = APL: q/2 = 100, so q = 200.
Find the second MPL by dividing q by L: (200 - 75)/(2 - 1) = 125.
Find the second missing q using the formula q/L = MPL: (q - 200)/(3 - 2) = 100,
so (q - 200) = 100, so q = 300.
Find the second missing APL by dividing q by L: 300/3 = 100.
Find the third missing APL by dividing q by L: 380/4 = 95.
Find the third missing MPL by dividing q by L: (380 - 300)/(4 - 3) = 80.
Find the third missing q using the formula q/L = MPL: (q - 380)/(5 - 4) = 50,
so (q - 380) = 50, so q = 430.
Find the fourth missing APL by dividing q by L: 430/5 = 86.
Find the fourth missing q using the formula q/L = APL: q/6 = 75, so q = 450.
Find the fourth missing MPL by dividing q by L: (450 - 430)/(6 - 5) = 20.

8.1. The question asks you to define TFC, TVC, TC, MC, etc. As definitions for all of
these are in the lecture notes and handouts, I’ll skip that part. Now for the table. As in
7.1 above, I have followed the book by putting marginal values in the next row.
 q TFC TVC TC MC AFC AVC ATC
1 $100 $50 $150 $50 $100 $50 $150
2 $100 $80 $180 $30 $50 $40 $60
3 $100 $120 $220 $40 $33.33 $40 $73.33
4 $100 $170 $270 $50 $25 $42.50 $67.50
5 $100 $250 $350 $80 $20 $50 $70

Since fixed cost does not change with quantity, every TFC = $100.
Using AFC = TFC/q, we can find all values for the AFC column.
First missing TC is found using TC = TFC + TVC = 100 + 50 = 150.
Second missing TC is found using the formula MC = TC/q: 30 = (TC - 150)/(2
-1), so TC = 180.
Third missing TC is found using the formulas ATC = AFC + AVC and ATC =
TC/q. Therefore, AFC + AVC = TC/q: 40 + 33.33 = TC/3, and so TC = 220.
Fourth missing TC value is found using the ATC = TC/q. Plugging in ATC = 70
and q = 5, we get TC = 350.
All missing TVC values are found using TVC = TC - TFC with the TC and TFC
values calculated above.
First missing MC is on the first line, but there is presumably a missing q = 0 line,
which has TFC = 100, TVC = 0, and TC = 100. Thus, MC = TC/q = (150 -
100)/(1 - 0) = 50.
Second and third missing MC values are found using MC = TC/q and the TC
values calculated above.
All missing AVC values are found using AVC = TVC/q and the AVC values
calculated above.
All missing ATC values are found using ATC = TC/q and the TC values calculated
above.

8.2. The book’s answer is fine, but here is some additional explanation. The law of
diminishing marginal returns is reflected by the upward-sloping section of the marginal
cost curve. Mathematically, MC = TC/q. Since fixed cost cannot change, another
valid formula is MC = TVC/q. When labor is the only variable input, TVC = w(L)
if w is the wage. Therefore, MC = w(L)/q = w(L/q) = w/MPL. We can now see that
MC is inversely related to MPL: when MPL goes down, MC goes up, and vice versa.
Additional questions:

1.
L q APL MPL
0 0 --
5
1 5 5
6
2 11 5.5
5
3 16 5.33

To find the missing quantities, add the MPL values to previous quantities: 0 + 5 = 5, 5 +
6 = 11, and 11 + 5 = 16. (We can do this because ΔL = 1 every time.)
To find the APL values, divide q by L: 5/1 = 5, 11/2 = 5.5, and 16/3 = 5.33.

2.
L q APL MPL
0 0 --
3
5 15 3
6
10 45 4.5
7
15 80 5.333

To find the first missing L, solve the following: 3 = 15/L, so L = 15/3 = 5.

To find the first missing MPL value, use the formula: MPL = (15 - 0)/(5 - 0) = 3.
To find the next missing L, solve the following: 6 = (45 - 15)/(L - 5).
To find the missing APL, use the formula: APL = 45/10 = 4.5.
To find the last missing L, solve the following: 5.33 = 80/L, so L = 80/5.333) = 15.
To find the last missing MPL, use the formula: MPL = (80 - 45)/(15 - 10) = 7.

3.
q TVC TC MC
0 0 20
10
1 10 30
15
2 25 45
20
3 45 65
To find the missing TVC values, add MC values to previous TVC values: 0 + 10 = 10, 10
+ 15 = 30, 30 + 15 = 45. We know TFC = 20 because TC = 0 when q = 0, so just add 20
to each TVC to get the TC.

4.
L q APL MPL
0 0 --
10
5 50 10
20
10 150 15
25
15 275 18.33
20
20 375 18.75
10
25 425 17
5
30 450 15

Find the first missing APL using APL = q/L = 50/5 = 10.
Find the first missing q using APL = q/L: 15 = q/10, so q = 150.
Find the first missing MPL using MPL = q/L = (275 - 150)/(15 - 10) = 25.
Find the second missing APL using APL = q/L = 275/15 = 18.33.
Find the second missing q using MPL = q/L: 20 = (q - 275)/(20 - 15), so 100 =
q - 275, so q = 375.
Find the third missing APL using APL = q/L = 375/20 = 18.75.
Find the third missing q using MPL = q/L: 5 = (q - 425)/(30 - 25), so 25 = q -
425, so q = 450.
5. Note: In this problem, your answers may differ slightly due to rounding or different
methods of calculation (since some values can be calculated more than one way).
q TFC TVC TC ATC MC
0 100 0 100 --
0.8
50 100 40 140 2.8
0.4
150 100 80 180 1.2
0.32
275 100 120 220 0.8
.4
375 100 160 260 0.69
0.8
425 100 200 300 0.71
1.6
450 100 240 340 0.75

Find the first missing TVC using TVC = TC - TFC = 140 - 100 = 40.
Find the first missing ATC using ATC = TC/q = 140/50 = 2.8.
Find the first missing TC using ATC = TC/q: 0.8 = TC/275, so TC = 220.
Find the first missing q using MC = TC/q: 0.32 = (220 - 180)/(275 - q), so
0.32(275 - q) = 40, so 88 - 0.32q = 40, so 48 = 0.32q, so q = 150.
Find the second missing ATC using ATC = TC/q = 180/150 = 1.2.
Find the second missing TVC using TVC = TC - TFC = 220 - 100 = 120.
Find the second missing q using ATC = TC/q: 0.69 = 260/q, so q = 376.81.
Actually, because ATC = 0.69 was a rounded figure, the actual TC = 375. I will
use this number instead of 376.81 in the remaining calculations (but it’s okay if
you used $376.81).
Find the second missing TC using ATC = TC/q: 0.71 = TC/425, so TC = 301.75.
Again, because ATC = 0.71 was a rounded figure, the actual TC = 300.
Find the third missing TVC using TVC = TC - TFC = 300 - 100 = 200.
Find the last missing q using MC = TC/q: 1.6 = (340 - 300)/(q - 425), so 1.6(q
- 425) = 40, so 1.6q - 680 = 40, so 1.6q = 720, so q = 450.
Find the last missing ATC using ATC = TC/q = 340/450 = 0.75.
Find the first missing MC using MC = TC/q = (180 - 140)/(150 - 50) = 0.4.
Find the second missing MC using MC = TC/q = (260 - 220)/(375 - 275) = 0.4.