Suppose that Alibaba Teak factory produces handcrafted cupbo

Suppose that Alibaba Teak factory produces handcrafted cupboard made from teak wood Table 1 illustrates Alibaba factory\'s cost of production for a week. Refer to Table 1 to answer the following questions. Table 1: Alibaba Teak Factorv\'s Cost of Production Measures of Cost for Alibaba Teak Factor Quantity of Teak Cupboard 0 Variable Costs (RM) Total Costs (RM) Fixed Costs (RM) 10 13 16 4 10 25 21 10 (a) Reproduce Table 1 in your answer booklet and compute the following costs. The fixed cost of production The variable cost of producing five cupboards i. ii. iii. The total cost of producing one, four and six cupboards (b) What is the average variable cost of producing four cupboards? (c) What is the marginal cost of production of the sixth cupboard? (5 marks) (2 marks) (2 marks) (d) Like all other firms, why does Alibaba production illustrates the law of diminishing marginal productivity? (3 marks)

Solution

Quantity

Variable Cost

Total Cost

Fixed Cost

Marginal Cost

AVC

0

0

10

10

NA

0

1

1

11

10

1

1

2

3

13

10

2

1.5

3

6

16

10

3

2

4

10

20

10

4

2.5

5

15

25

10

5

3

6

21

31

10

6

3.5

a. i. Fixed cost = 10. It remains constant at all levels of output.

ii. Variable cost at 5 units is 15.

iii. Total cost of producing 1 unit is 11, 4 units is 20 & 6 units is 31.

b. Average variable cost of 4 cupboards is 2.5

c. Marginal cost of 6^th cupboard is 6.

d. The law of diminishing marginal productivity states that while increasing one input and keeping other inputs at the same level may initially increase output, further increases in that input will have a limited effect and will ultimately have no effect, or a negative effect, on output.

Marginal productivity refers to the extra output yielded by an additional unit of input. The law of diminishing marginal returns states that when a factor of production is fixed, there is a point at which an increasing volume of variable factors will become less productive. This means that each additional unit of input will produce less output than the prior unit of input. Diminishing marginal productivity results from rising short-term average costs.

Quantity	Variable Cost	Total Cost	Fixed Cost	Marginal Cost	AVC
0	0	10	10	NA	0
1	1	11	10	1	1
2	3	13	10	2	1.5
3	6	16	10	3	2
4	10	20	10	4	2.5
5	15	25	10	5	3
6	21	31	10	6	3.5