03 Jun Question Problem 1 Consider a firm that has just built a plant, which cost $20,000. Each worker costs $5.00 per hour. Based on this information, fill in the table below
Question
Problem 1
Consider a firm that has just built a plant, which cost $20,000. Each worker costs $5.00
per hour. Based on this information, fill in the table below.
Number
of
Worker
Hours
0
50
100
150
200
250
300
350
Marginal
Product
0
400
900
1300
1600
1800
1900
1950
Fixed
Cost
Variable
Cost
—
Total
Cost
Marginal
Cost
20,000
20,250
20,500
20,750
21,000
21,250
21,500
21,750
Output
Average
Variable
Cost
—
—
Problem 2
Number Of
Workers
0
1
2
3
4
5
6
7
8
9
10
Output
0
50
110
300
450
590
665
700
725
710
705
The table above shows the weekly relationship between output and number of workers
for a factory with a fixed size of plant.
a. Calculate the marginal product of labor.
b. At what point does diminishing returns set in?
c. Calculate the average product of labor.
d. Find the three stages of production.
Average
Total
Cost
—
Problem 3
Mr. Lee operates a green grocery in a building he owns in one of the outer boroughs of
New York City. Recently, a large chemical firm offered him a position as a senior
engineer designing plants for its Asian operations. (Mr. Lee has a masters degree in
chemical engineering.) His salary plus benefits would be $95,000 per year. A recent
annual financial statement of his stores operations indicates the following:
____________________________________________
Revenue
$625,000
Cost of goods sold
325,000
Wages of workers
75,000
Taxes, insurance, maintenance, and
depreciation on building
30,000
Interest on business loan (10 %)
5,000
Other miscellaneous expenses
15,000
Profit before taxes
$175,000
____________________________________________
If Mr. Lee decides to take the job, he knows that he can sell the store for $350,000
because of the goodwill built with a steady clientele of neighborhood customers and the
excellent location of the building. If he would still hold onto the building, he knows he
could earn a rent of $50,000 on this asset. If he did sell the business, assume he would
use some of the proceeds from the sale to pay off his business loan of $50,000. He could
then invest the difference of $300,000 (i.e., $350,000 – $50,000) and expect to receive an
annual return of 9 percent. Should Mr. Lee sell the business and go to work for the
chemical company?
In answering this question, also consider the following information:
a. In his own business, Mr. Lee works between 16 and 18 hours a day, 6 days a week. He
can expect to work between 10 and 12 hours a day, 5 days a week, in the chemical
company.
b. Currently, Mr. Lee is assisted by his wife and his brother, both of whom receive no salary
but share in the profits of the business.
c. Mr. Lee expects his salary and the profits of his business to increase at roughly the same
rate over the next 5 years.
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