Question

Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when the firm hires 4 workers, the firm produces 50 units of output. If the fixed cost of production is $4, the variable cost per unit of labor is $20, and the marginal product of labor for the fifth unit of labor is 2, what is the average total cost of production when the firm hires 5 workers

Answer 1

Answer:

average total cost = $2 per unit

Explanation:

number of workers         total output         total variable costs

            4                                50                        $80

            5                                52                       $100

fixed costs = $4

average total cost when firm hires 5 workers = total costs / total output = ($100 + $4) / 52 = $104 / 52 = $2 per unit

Marginal product of labor is the extra output generated by employing one additional unit of labor.

Answer 2

Answer:

$2

Explanation:

Average total cost is the total cost of production, both variable and fixed cost divided by the no of units produced.

When hired worker = 4 ,

Production = 50 units.

Fixed cost of production = $4

Variable cost of production = $20 ( note that the only variable input is labor)

Marginal product for the 5th labor =2 ( total unit becomes 52)

Average total cost =

(5 *20) + 4 /52 =2