Reference no: EM13798570

Demonstrates how cost and production analysis aids managers in making decisions that maximize profit. To conduct this analysis, thoroughly review the Background materials, fill in the tables.

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	n/a	n/a
1	100	100	100
2	300
3	450
4			110
5	630
6		110

• Complete this table.

Table 2
Labor	Total Product (TP)	Total Variable Cost (TVC)	Total Cost (TC)
0	0	n/a	4,000
1	100	2,000
2	300
3	450
4			12,000
5	630
6		12,000

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

• 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	n/a	n/a	n/a
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?

• 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	n/a	n/a
1	120	120	120
2	360
3	540
4	672
5	756
6	792

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	n/a
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	n/a	n/a	n/a
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 $4,000, but the cost of labor rises. Specifically, suppose that a worker now receives $3,000 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	n/a	4,000
1	100	3,000
2	300
3	450
4			16,000
5	630
6		18,000

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?