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ES2555 PROJECT PART 1 (ITT TECH)

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 ES2555 Survey of Economics

 

PROJECT PART 1: APPLICATIONS OF MICROECONOMICS AN

MACROECONOMICS

 

Ti!"e: Pro#uc!ion ecisions

 

Suppose you are in charge of a rm that produces skateboards. The

company’s xed inputs include the building and equipment, and the variable

inputs are the raw materials and workers. ou need to determine the best

number of employees to use during each shift. !ocus on the relationship

between the number of workers employed on the assembly line and the

number of skateboards produced per shift.

 

"utput varies with the number of workers employed as shown in the table

below. #omplete the table by calculating the average product $%&' for each

level of labor and the marginal product $(&' of each additional worker.

 

 To calculate the average product, divide the output number by the labor

number. !or example, with two workers, we have an output of ). *ight

divided by two equals four $)+ - '/ thus, the average output is .

 

(arginal product is equal to output minus the output for the prior number of

laborers. To calculate the marginal product, subtract the output for the

previous number of workers from the output for the current number ofworkers. !or example, with two workers and an output of ), we have a

marginal product of 0 because ) $the output for workers' minus 1 $the

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output for 2 worker which is the previous number of workers employed'

equals 0.

3s this production function consistent with the law of diminishing marginal

returns4 *xplain.

Fi"" in !$e %"&n':

 This production function shows that diminishing marginal product $or

diminishing returns' sets in when the 4thworker is added.

 

 ou will now determine the optimal, or prot5maximi6ing, level of output for a

skateboard5manufacturing rm. our rm’s xed cost is equal to 789 per day.:emember that xed costs are the same at all levels of output. ;ariable costs

depend on how many units of labor you decide to employ. The daily payroll

cost is 79 per worker.

 

< (ultiply this cost per worker by labor to calculate variable cost.

 

• %dd xed cost and variable cost to nd total cost.

 

< #alculate marginal cost by dividing the change in total cost by the change

in output.

 

< #omplete the missing values in the table.

 

:emember that output should always be increased as long as marginal

product is rising or marginal cost is falling. "nce marginal cost begins to rise,

re=ecting the law of diminishing returns, output should be increased only if

marginal revenue exceeds marginal cost.

 

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(arginal revenue is equal to product price if this rm is in a perfectly

competitive market. Assume the marginal revenue and price is both

equal to $25.

 

Ans(er !$e fo""o(in) *ues!ions:

2. Should output be increased from 20 to >4 That is, should the fourth

worker be hired4 ?se the marginal approach to explain why or why not.

. Should output be increased from > to 4 That is, should the fth worker

be hired4 ?se the marginal approach to explain why or why not.

1. #alculate prot assuming output is 20. Show all the calculation steps.

. #alculate prot assuming output is >. Show all the calculation steps.

0. #alculate prot assuming output is . Show all the calculation steps.

9. %ssuming the rm’s goal is to maximi6e prot, how many workers should

you employ and how much output should be produced each day4