3 microeconomics questions/

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Cite the source(s) used to answer this question. Provide the source(s) below your response and apply APA guidelines for references.

 

EXAMPLE 1: Class, let's consider a situation in which it is lunch time, and there are long lines of people ordering food. Assume that throughout this time there are many customers in the store placing orders. Suppose that at that point you only have 3 cooks and 3 preparers ("preps"). (Usually, the restaurants are well prepared prior to this time, but let's assume this is happening).They are working as hard as they can trying to keep up with the orders. They are able to serve four orders per minute. Then another worker comes to the store and gets to work. Now, the team is able to serve 7 people per minute. What is the marginal product (MP) of the additional worker? It is three orders per minute. Suppose a short time later another worker punches the clock. Now, the team is able to serve 9 people per minute. The MP of an additional worker is now 2 orders per minute. A third worker punches the clock, and now your store serves 10 people per minute. The MP is now 1 order per minute. A fourth worker punches the clock, and adds nothing to the pace of servings. The team still serves 10 orders per minute. The team is now feeling so relaxed that some of the workers are talking about what they did on their day off, what happened on their favorite TV show, etc. 

 

QUESTION 1: Class, what is meant by marginal cost? What happens to marginal cost in the process I described above? Think carefully about the definition of marginal cost, make up some numbers, and apply it to the steps in my example.

 

EXAMPLE 2: Class, let's take a look at how it would work in a completely different setting. In a construction project, for example, heavy equipment is operated by a single person, and you will not see a situation in which more than one person is operating the same bulldozer, or similar equipment, at the same moment. However, often you see a project with several bulldozers being operated. Is it possible that the marginal product of an additional bulldozer will be less than the marginal product of the previously employed bulldozer with its driver if other resources are fixed? Why would this happen? The bulldozer is just one of many resources that are used to complete a project. In order to be effective, a bulldozer and its driver need to be supported by various other workers and machines. At any given moment in time, those other resources are fixed. That is, we assume that only the bulldozer with one driver is added and all other inputs, which support the bulldozer, do not change. So if we add the bulldozer and driver and maintain the other resources fixed, the marginal product of the bulldozer could decrease.

 

QUESTION 2: Class, what if one or more of the other resources is increased. What could happen to the marginal product of an additional bulldozer and driver if the resource constraint is relaxed? Explain.

 

EXAMPLE 3: Suppose that we want to know the MC (i.e., additional cost) of making 100 more chairs per week. For the sake of simplicity, let's assume that variable cost is only the wage that we have to pay to the additional workers we hire to make them. Suppose that we hire 4 workers of equal quality, and pay them each the going wage of $100. The MC, therefore, is $400. Next week we get an order for an additional 100 chairs (i.e., we are doubling production to 200 chairs), so the company needs to hire more workers. (Notice that in this example I am increasing the production by equal units, which allows us to more easily see the link between production and cost at the margin). How many? Well, due to diminishing MP, the firm needs to hire, say, 5 more workers to make 100 additional chairs. Why not 4 more workers like the previous week? The MP has decreased so 4 more cannot produce 100 more chairs in a single week. You need to bring in five additional workers to get the additional 100 chairs (i.e., now you have a staff of 9 workers, so you have more than doubled the number of employees). What is the MC associated with 100 more chairs? It is $500. The MC has increased because the MP has decreased. This is why the MC curve tends to slope upward at high levels of output. See the table and chart in Figure 11-1 and Table 11-1 for another numerical example of this relationship. If the MP had stayed the same, you would have hired an additional 4 workers (i.e., doubled the number of employees), and your MC would have $400 as in the previous week.

 

QUESTION 3: Class, what happens to the total cost curve? What explains its shape? In my example above, what happens to fixed costs (note: I have not given you the value of fixed cost, but you do not need a value to answer this question)?

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