Question

Consider a firm with only one variable input, labor. Firm output is zero when labor is zero. When the firm hires 6 workers the firm produces 90 units of output. Fixed costs of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the average variable cost of production when the firm hires 7 workers?

Answer 1

Answer:

The average variable cost of production when the firm hires 7 workers is 81.77 cents

Explanation:

For 6 workers,

The fixed cost is = $6

And, the variable cost is = Variable cost per unit × number of workers

                                        = $10 × 6

                                        = $60

For 7 workers,

The fixed cost is = $6

And, the variable cost is = Variable cost per unit × number of workers

                                        = $10 × 7

                                        = $70

The average variable cost equals to

= (Variable cost ÷ number of units) + marginal product of the seventh unit of labor

= $70 ÷ 90 units + 4

= 77.77 + 4

= 81.77 cents

Answer 2

Answer:

$0.808

Explanation:

Given:

Number of workers hired = 6

Number of units to be produced = 90

Fixed cost of the product = $6 per unit

Variable cost = $10 per unit

Marginal product of the 7th unit of labor = 4

Now,

Total variable cost = Variable cost per unit labor × Total labor hired

or

The total variable cost = $10 × 7 = $70

Thus,

The total cost = Fixed cost + Total variable cost

or

The total cost = $6 + $70 = $76

Now,

the total units produced

= Unit produced by 6 labor + marginal product from seventh labor

or

The total units produced = 90 + 4 = 94

Hence,

the average variable cost of production when the firm hires 7 workers

= $\frac{\textup{Total cost of production}}{\textup{Total units produced}}$

or

= $\frac{76}{94}$

= $0.808