1.

    Relationship between Productivity and Costs

Foothills Refrigerators assembles refrigerators for retail sales and pays all their workers $10 per hour and
incur $500 of fixed costs per week.  The following table indicates their weekly production function using
labour as their only variable input:

A. Using the above information, create a table and calculate the marginal product (MP) average
product (AP), total cost (TC), and marginal cost (MC).
B. Graph the marginal product (MP) and the average product (AP) on one graph.

C. Do we observe increasing, constant, diminishing returns to labour or some combination of the three? 
Explain.

Answer: Yes, we observed because as the labor increases, the number of the product to be produced
also increase and at some point it remains. On this case, diminishing marginal product occurs when
there’s an extra additional production unit produces a reduced level of output. It’s actually a
combination of the three.

Labour Output(Q)
(L)
0 0
1 10
3 18
5 24
7 28
Perfectly Competitive Markets.

Given the following information about a firm under perfect competition:

Q TC
0 50
1 125
2 135
4 140
6 150
7 160
8 175
10 215

Calculate the firm’s MC, ATC, AFC, and AVC, for the given levels of output. 
If the price of the product is $20, at what output will the firm maximize its profits?  Calculate the profits
at the above profit-maximizing output? At what price should the firm shut down operations in the short
run? 

Answer: This firm should not continue to operate because the price in the market fell below its average
cost of production in the short run. This firm should never produce if its price falls below average cost.

 III. 
1. Define marginal cost.

Answer: Marginal cost is the additional cost incurred in the production of one more unit of a
good or service. It is derived from the variable cost of production, given that fixed costs do not
change as output changes, hence no additional fixed cost is incurred in producing another unit
of a good or service once production has already started.

Marginal cost will tend to fall at first, but quickly rise as marginal returns to the variable factor
inputs will start to diminish, which makes the marginal factors more expensive to employ. This
is referred to as the ‘law of diminishing marginal returns’.

Marginal cost is significant in economic theory because a profit maximizing firm will produce up
to the point where marginal cost (MC) equals marginal revenue (MR).
1. Jennifer's towel cleaners has fixed costs of P100 per day and a total cost curve as given in the table
below. Output is the number of carpets cleaned. Given this data, answer the questions below.

Output Total Cost

No. of Towels Total Cost Marginal Cost

10   200   -
20 10 320 120 12
30 10 460 140 14
40 10 620 160 16
50 10 800 180 18
60 10 1000 200 20

1. The current price for cleaning a towel is P18. How many carpets must be cleaned to maximize
profits? What will the profit be?

Answer: I believed that 40 carpets should be cleaned to maximize the profit. The profit/loss is
Php300.00

1. Suppose the price falls to P14. Calculate the profit-maximizing output and the total
Profits.
Answer: : This company should not continue to operate because the price in the market fell below its
average cost of production in the short run. This firm should never produce if its price falls below
average cost. And as you can see the company doesn’t generate amount but it has loss of Php-460.00.

2. Consider the following situation, determine: i) Profit-maximizing output level, and ii) total profits = A. 
   Fixed Costs = P0; price = P80

Output Total Marginal Cost Fixed Cost Marginal Revenue Total Revenue Profi
Cost t
1 4 = 0 80 80 76

2 9 5 0 80 160 151

3 15 6 0 80 240 225

4 21 6 0 80 320 299

5 28 7 0 80 400 372

6 36 8 0 80 480 444

7 45 9 0 80 560 515

8 55 10 0 80 640 585

Answer: The Total Profit is Php2, 667.00.