BEC 30325: MANAGERIAL ECONOMICS

Tutorial 07
Theory of Production and Cost

1) MAAS Intimate is a firm operating in the garment industry. The firm uses labour
as its main resource. The changes in Total Product over different levels of labour
are given in the table below. It is assumed that within this range of labour, the
plant size is fixed.

Rate of Labour TPL APL MPL

Input
0 0
1 20
2 50
3 90
4 120
5 140
6 150
7 155
8 150

a. Does this belong to short run or long run, under the theory of production?
b. Compute total product, average product and marginal product of labour.
2) Suppose that the following table gives you data on the total labour productivity
(TPL) of producing a certain product.

Land 1 1 1 1 1 1 1 1 1 1
Labour 0 1 2 3 4 5 6 7 8 9
Total
Production
0 2 5 9 12 14 15 15 14 12
of Labour
(TPL)

a. Based on the above data

i. Find the AP and the MP of labour and

ii. Plot TPL , APL and MPL curves on the same set of axes
 iii. Mark three stages of production with regards to the employment of
labour and where law of diminishing returns can be operating on the
same diagram

3) The output of ABC limited is given and the relevant Total cost is also given.
Calculate – TFC, TVC, AC, AFC, AVC and MC from the following table:

Output 0 1 2 3 4 5 6
Total Cost 40 100 120 130 150 190 210

4) Determine whether each of the following is true or false. Explain why.

a. A plant that has only variable inputs can be considered as operating in the long
run.
b. Law of diminishing marginal returns sets in when marginal revenue reached
zero.
c. When average cost is above marginal cost, marginal cost should be declining.
d. Average cost equals marginal cost at the minimum efficient scale of plant.
e. If εC > 1, diseconomies of scale and increasing average costs are indicated.