Handout 8 Producer Theory – Production and Cost Functions This handout contains exercises of - Producer Theory Things you should know - How to find total products, marginal products and average products from production function? What is the shape of each curve? - What is increasing returns, diminishing returns, and negative returns to labor? Exercises Question 1 (Productivity) The following table describes how many T-shirts can each firm produce given the amount of workers hired. Describe the characteristic of each firm in regards to its returns to labor. Workers Hired Firm A Firm B Firm C 1 100 200 600 2 400 400 800 3 800 600 900 4 1000 800 960 5 900 1000 1000 Question 3 (Production Function) Suppose the production function and the marginal product are given by Production function: TP = 100L2 – L3 Marginal product: MP = 200L – 3L2 What are the level of workers (L) and quantity produced (TP) such that the average product (AP) and marginal product (MP) intersect? Draw the AP and MP curves. Question 4 (Numerical Example of Productions and Costs) The following table describes the productions and costs of Poison Catering and Food Co. at each level of worker L hired. The company has to operate its kitchen regardless of its operation, costing $100. The wage is $100 for each worker hired. The quantity produced by L workers hired is given in total product (TP). Fixed cost, variable cost, and total cost are FC, VC, and TC, respectively. L TP MP AP FC VC TC AFC AVC ATC MC 0 0 1 40 40 40 2 100 60 2 3 1.67 3 80 60 0.56 1.67 2.22 1.25 4 240 60 60 0.42 1.67 2.08 1.67 5 280 56 0.36 1.79 2.14 2.5 6 20 0.33 1. List the definition of marginal product (MP), average product (AP), average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC) 2. Fill in the blanks in the table above. 3. At what level or range of level of workers hired does the marginal product curve intersects the average product curve? 4. At what level or range of level of quantity produced does the marginal cost curve intersects the average variable cost curve? 1 5. At what level or range of level of quantity produced does the marginal cost curve intersects the average total cost curve? 2