# Production and cost analysis

The following table gives the total weekly output of bicycles at Al's Bicycle Town.

Table 1

Labor Total Product (TP) Average Product of labor (AP) Marginal Product of labor (MP)

0 0 na na

1 100 100 100

2 300 ----- ___

3 450 ___ ___

4 ___ ___ 110

5 630 ___ ___

6 ___ 110 ___

•Complete this table.

•Draw the graphs of the marginal product (MP) and the average product (AP).

•To learn how to plot the data in Excel, see https://www.youtube.com/watch?v=B3U9tDcoNeI

•Where do the AP and MP curve cross?

The cost of 1 worker is $2000 per month. Total fixed cost is $4000 per month.

•Complete Table 2 using your answers from Table 1 and by computing total variable cost (TVC) and total cost(TC).

Table 2

Labor Total Product (TP) Total variable cost (TVC) Total cost (TC)

0 0 na 4000

1 100 2000 ___

2 300 ----- ___

3 450 ___ ___

4 ___ ___ 12000

5 630 ___ ___

6 ___ 12000 ___

•Draw the graphs of the TC and TVC curves. What is the relationship between these two curves?

•Complete Table 3 by using your answers from the previous Tables and calculating the AVC, ATC, and MC.

Table 3

Total Product (TP) Average variable cost (AVC) Average total cost (ATC) Marginal cost (MC)

0 na na na

100 20 ___ 20

300 ----- ___ ___

450 ___ ___ ___

___ ___ 21.43 ___

630 ___ ___ ___

___ ___ ___ 66.67

•Draw the graphs of the ATC, AVC, and MC curves. What is the relationship between the ATC and AVC curves? Between the MC and AVC curves?

Suppose that Al discovers new technology that boosts the productivity of his workers, so that more bicycles can be produced than before.

•Complete Table 4, which presents production data with the new technology.

Table 4

Labor Total Product (TP) Average Product of labor (AP) Marginal Product of labor (MP)

0 0 na na

1 120 120 120

2 360 ----- ___

3 540 ___ ___

4 672 ___ ___

5 756 ___ ___

6 792 ___ ___

Al's fixed cost remains at $4000, and he can continue to hire workers at the monthly rate of $2000.

•Use the new technology data to complete Tables 5 and 6.

Table 5

Labor Total Product (TP) Total variable cost (TVC) Total cost (TC)

0 0 na ___

1 120 ___ ___

2 360 ----- ___

3 540 ___ ___

4 672 ___ ___

5 756 ___ ___

6 792 ___ ___

•Draw the ATC and MC curves you just entered in Table 5. How do the old and new ATC curves compare? The old and the new MC curves?

Table 6

Total Product (TP) Average variable cost (AVC) Average total cost (ATC) Marginal cost (MC)

0 na na na

120 ___ ___ ___

360 ----- ___ ___

540 ___ ___ ___

672 ___ ___ ___

756 ___ ___ ___

792 ___ ___ ___

Return to the old technology data. Suppose that the cost of Al's fixed inputs remains the same at $4000, but the cost of labor rises. Specifically, suppose that a worker now receives $3000 per month.

•Complete Table 7. For the two missing TP copy your answers from Table 1

Table 7

Labor Total Product (TP) Total variable cost (TVC) Total cost (TC)

0 0 na 4000

1 100 3000 ___

2 300 ----- ___

3 450 ___ ___

4 ___ ___ 16000

5 630 ___ ___

6 ___ 18000 ___

In Table 8 compare the cost before and after the increase

Table 8

Before the increase After the increase

TP ATC MC ATC MC

0 ___ ___ ___ ___

100 ___ ___ ___ ___

300 ___ ___ ___ ___

450 ___ ___ ___ ___

___ ___ ___ ___ ___

630 ___ ___ ___ ___

___ ___ ___ ___ ___

•Last question: how did the rise in variable costs affect the average total cost? The marginal cost?

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