1. The total product schedule of company X which produces T-shirts is described by the following:

Labor                                 Output                                                                                        (workers per week)    (units per week)

1                                              1

2                                               2

3                                               6

4                                             10

5                                              15

6                                              21

7                                              26

8                                              30

9                                              33

10                                            35

1.1 Draw the average and marginal product curves of company X.

1.2 What is the relationship between the average and marginal product curves?

1.3 Suppose the price of labor is $400 per week, and the total fixed cost is $1,000 per week, calculate the total cost, the average cost and the marginal cost for each level of output.

1.4 What will be the effects on the average and marginal cost curves if the price of labor increases from $400 per week to $450 per week?

1.5 Suppose company X can buy an additional factory so that its total output can be doubled. If the fixed cost of operating the second factory is the same as the first one and the wage rate is $400 per week, draw the long-run average cost curve of company X. Over what range of output would it be efficient for company X to operate two factories?

2. Which concept of profits is implied in the following quotations:

2.1 "Profits are necessary if firms are to stay in business."

2.2 "Profits are signals for firms to expand production and investment."

2.3 "Accelerated depreciation allowances lower profits and thus benefit the company’s owners."

3. Indicate whether each of the following conforms to the hypothesis of diminishing returns, and if so, whether it refers to marginal returns, average returns, or both.

3.1 "The bigger they are, the harder they fall."

3.2 "Five workers produce twice as much today as 10 workers did 40 years ago."

Production & Cost - Discussion Topic Questions:

(I) A carpenter quits his job at a furniture factory to open his own business. In his first two years of operation, his sales average $100,000 and his operating costs for wood, workshop and tools rental, utilities and miscellaneous expenses average $70,000. Now his old job at the furniture factory is again available. Should he take it or remain in business for himself? How would you make this decision?