Answers to Homework, January 10th, 2013

1. Marty’s Frozen Yogurt

a Fixed inputs: machines, refrigerators

b. Mix, cups, sprinkles, workers

c. Output on y-axis, input on x-axis, upward sloping curve showing increasingly flat at larger levels of input

d. 110, 90, 70, 30, 20, 10

e. Each additional worker added adds less to total production (output) than the previous worker added, causing diminishing marginal returns.

2. 

Q of labor column: 0 1 2 3 4 5 6

Q of cups column: 0 110 200 279 300 320 330

VC column: 0 135 260 375 470 560 645 (need to add cost of workers + cost of cups)

FC column: $100

TC column: 100 235 360 475 570 660 745

ATC column: – 2.14 1.80 1.76 1.90 2.06 2.26

MC column: 1.23 1.39 1.64 3.17 4.50 8.50

Efficient scale = minimum ATC, which is when ATC = 1.76.  Efficient scale is the quantity at that level, which equals 3 workers, 270 cups.

3. AFC decreases as quantity increases due to the spreading effect: FC is getting spread out over greater and greater quantities of output

AVC increases as quantity increases (to larger levels of output) due to the diminishing returns effect: each additional variable input (worker) adds less to total production than the previous variable input (worker) added, making each additional worker increasingly costly to hire (because they don’t add to production as much as earlier workers added).