Consider a firm competing in a perfectly competitive market

Consider a firm competing in a perfectly competitive market where capital and labor are paid constant wages 0200 1205 220 3 20 65 420 520105 100 100 100 100 100 100 10 16 2,100 (a) Fill in the above table (1 point) (b) How much does each unit of capital cost? (1/2 point) (c) At what level of labor utilization does the law of diminishing returns first appear? (1/2 point)

Solution

1) Solution:

L

K

Q

VC

FC

TC

ATC

MC

MPL

0

20

0

0

100

100

-

-

-

1

20

5

400

100

500

100

80

5

2

20

15

800

100

900

60

53.33

10

3

20

65

1200

100

1300

20

18.46

50

4

20

100

1600

100

1700

17

16

35

5

20

105

2000

100

2100

20

19.05

5

Explanatio:

FC: FC remains fixed irrespective of number of units produced

TC = FC + VC

VC = 400 * No. of labor

ATC : TC/Q

MPL: Change in quantity of labor

2) Cost of each unit of capital = FC/ K = 100 / 20 = 5

3) At 4 units of labor we firstly noticed the occurrence of the law of diminishing returns

L	K	Q	VC	FC	TC	ATC	MC	MPL
0	20	0	0	100	100	-	-	-
1	20	5	400	100	500	100	80	5
2	20	15	800	100	900	60	53.33	10
3	20	65	1200	100	1300	20	18.46	50
4	20	100	1600	100	1700	17	16	35
5	20	105	2000	100	2100	20	19.05	5