Module 2 Case Production And Cost Assignment Overview

Module 2 Caseproduction And Costsassignment Overviewbefore Beginning

Suppose you own a television factory and at your current level of output you have average total cost of $800 per television, average variable costs of $700 per television, and a marginal cost of $400. If the price your buyers are willing to pay is $500, should you decrease or increase production? Explain your reasoning, and make sure to cite at least one of the required readings in your answer.

You are the owner of a restaurant, and currently you have only one waiter. While this keeps costs down, many of your customers go home because they are tired of waiting. You hire four more waiters and waitresses, increasing your capacity to serve customers. Subsequently, you hire 20 more waiters and waitresses, but you are unable to serve more customers than when you had only four staff members. Your restaurant becomes overly crowded, and staff cannot be accommodated effectively. Explain the concept from the background readings that best describes what happened in this case, including your reasoning.

Using the provided data on bicycle production, complete the tables, draw graphs of the marginal product (MP) and the average product (AP), and analyze the relationship between AP and MP curves. Additionally, calculate total variable cost (TVC), total cost (TC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC). Draw the graphs of the TC, TVC, ATC, AVC, and MC curves, and explain the relationships between these curves.

Paper For Above instruction

The evaluation of production costs and the optimal level of output are critical concepts in economic theory, underpinning decision-making in both manufacturing and service industries. The initial problem is to assess whether a television factory should increase or decrease production based on the provided cost and price data. The subsequent scenario explores the law of diminishing returns as demonstrated by a restaurant hiring additional staff. The analysis of bicycle production further consolidates understanding through quantitative methods including data interpretation, graph plotting, and cost calculations.

Analysis of the Television Factory Scenario

In the given scenario, the factory's average total cost (ATC) per television is $800, while the average variable cost (AVC) is $700, and the marginal cost (MC) is $400. The price consumers are willing to pay is $500 per television. To determine whether to increase or decrease production, it is fundamental to analyze the relationship between marginal cost and price. When marginal cost (MC) is less than the price, increasing production typically adds to profits, as each additional unit costs less to produce than the price it fetches. Conversely, when MC exceeds the price, producing more results in losses because the cost of producing each additional unit surpasses what customers pay.

In this case, MC ($400) is less than the price ($500), which suggests that increasing production would be profitable, as the firm would be earning a contribution margin of $100 on each additional unit (price of $500 minus MC of $400). Moreover, since the ATC ($800) exceeds the price of $500, the firm is incurring a loss at this output level; however, as long as MC

Case of Hiring Additional Restaurant Staff and Diminishing Returns

The restaurant scenario illustrates the law of diminishing marginal returns. Initially, hiring four waiters increased productivity notably, likely because more staff reduced customer waiting times and improved service efficiency. However, when hiring 20 more waiters, there was no additional increase in service capacity, and the restaurant became overly crowded. This phenomenon reflects the concept that beyond a certain point, adding more input (labor) results in smaller or negative incremental gains in output.

The concept from the background readings that best describes this situation is the law of diminishing marginal returns. This law states that, ceteris paribus, adding more of one input while holding others constant will eventually lead to a decline in the marginal product of that input. Overcrowding and space constraints prevent additional staff from contributing effectively to service output, which causes productivity to plateau or decline. This scenario emphasizes the importance of optimal input levels for maximizing efficiency, as discussed by Samuelson and Nordhaus (2010), who highlight that the benefits of additional inputs diminish after a certain point due to physical or managerial limitations.

Quantitative Analysis of Bicycle Production Data

The provided data table on bicycle production is incomplete; thus, calculations are necessary to fill in missing values. Starting with total product (TP), average product (AP), and marginal product (MP), the calculations proceed as follows:

For labor 2, the total product is 300, and for 3, it is 450. The AP for labor 2 is 150 (300/2), and for 3, it is 150 as well (450/3). The MP is the change in total product when labor increases by one unit. From 2 to 3 workers, the MP is 150 (450 - 300). From 3 to 4 workers, assuming the total product increases to 600, MP would be 150 (600 - 450). Similarly, for 6 workers, the total product could be 660, with the MP of the 6th worker being 60 (660 - 600). These calculations help determine the productivity patterns and efficiency levels at different input stages.

Graphing the MP and AP curves reveals the classical shape of diminishing returns, where MP rises initially, peaks, and then declines, crossing the AP at its maximum. The AP curve initially increases, reaches a maximum, and then declines after the MP falls below the AP. This interplay is foundational in understanding optimal input levels, as the point where MP equals AP corresponds to the maximum AP, an important strategic consideration for resource allocation.

Cost Calculations and Graphs

Given total fixed costs (TFC) of $4000 per month and labor costs of $2000 per worker per month, the total variable costs (TVC) for different labor units are calculated as:

• For 2 workers: TVC = 2 x $2000 = $4000
• For 3 workers: TVC = 3 x $2000 = $6000
• For 4 workers: TVC = 4 x $2000 = $8000
• For 6 workers: TVC = 6 x $2000 = $12000

Calculating total cost (TC) involves summing TFC and TVC:

• At 0 workers: TC = $4000
• At 2 workers: TC = $4000 + $4000 = $8000
• At 3 workers: TC = $4000 + $6000 = $10000
• At 4 workers: TC = $4000 + $8000 = $12000
• At 6 workers: TC = $4000 + $12000 = $16000

Graphing TC and TVC curves shows that TC is always above TVC by the fixed cost component. The linear relationship between TFC and TC indicates that fixed costs remain constant irrespective of output, whereas variable costs increase with production, which aligns with economic theory.

Further Cost Metrics and Curve Relationships

Using the total product and total costs, AVC, ATC, and MC are computed as follows:

• AVC = TVC / TP
• ATC = TC / TP
• MC = Change in TC / Change in TP

For example, at 3 workers, TP = 450, TVC = $6000:

AVC = $6000 / 450 ≈ $13.33

ATC = $10000 / 450 ≈ $22.22

MC between 2 and 3 workers: (Change in TC) / (Change in TP) = ($10000 - $8000) / (450 - 300) = $2000 / 150 ≈ $13.33

Plotting ATC, AVC, and MC curves will reveal the typical U-shape for ATC and AVC, and the MC curve intersects both the ATC and AVC at their minimum points, illustrating the cost relationships detailed by Varian (2014). The ATC curve always lies above AVC, and the distance between them widens as output increases, reflecting spreading fixed costs over more units.

Conclusion

Understanding production costs and optimizing output levels are essential for business profitability. Cost concepts like marginal cost, average cost, and the law of diminishing returns guide managerial decisions. The graphical analyses reinforce these concepts, illustrating how cost curves relate and influence strategic choices. Implementing these principles effectively can lead to improved efficiency and profit maximization in manufacturing and service sectors alike.

References

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