MC stands for marginal cost. For this problem assume that the price of labor and the price of capital is
constant.
L
K
Q
MPL
VC
FC
TC
AVC
AFC
ATC
MC
0
5
0
-----
----
-----
-----
-----
1
5
2
2
5
6
$1.25/unit
of output
3
5
6
4
5
7
5
5
25
6
5
30
$30
7
5
4
8
5
3
9
5
2
10
5
40
a. Fill in the missing cells in the above table.
b. What is the price of labor?
c. What is the price of capital?
d. At what level of labor usage does diminishing marginal returns to labor first occur?
e. At what level of output is marginal cost equal to average variable cost?
f. At what level of output is marginal cost equal to average total cost? If price is equal to MC is equal to
ATC, then what are the firm’s profits? Verify that your answer is correct?
g. If the product sells for $5 per unit in a perfectly competitive industry, how many units should this firm
produce? What will the firm’s profits be in the short run?
4.
4

a.
L
K
Q
MPL
VC
FC
TC
AVC
AFC
ATC
MC
0
5
0
-----
$0
$7.50
$7.50
----
-----
-----
-----
1
5
2
2
$5
$7.50
$12.50
$2.50/unit
of output
$3.75/unit
of output
$6.25/unit
of output
$2.50/unit
of output
2
5
6
4
$10
$7.50
$17.50
$1.67/unit
of output
$1.25/unit
of output
$2.92/unit
of output
$1.25/unit
of output
3
5
12
6
$15
$7.50
$22.50
$1.25/unit
of output
$.63/unit
of output
$1.88/unit
of output
$.83/unit
of output
4
5
19
7
$20
$7.50
$27.50
$1.05/unit
of output
$.39/unit
of output
$1.44/unit
of output
$.71/unit
of output
5
5
25
6
$25
$7.50
$32.50
$100/unit
of output
$.30/unit
of output
$1.30/unit
of output
$.83/unit
of output
6
5
30
5
$30
$7.50
$37.50
$1.00/unit
of output
$.25/unit
of output
$1.25/unit
of output
$1.00/unit
of output
7
5
34
4
$35
$7.50
$42.50
$1.03/unit
of output
$.22/unit
of output
$1.25/unit
of output
$1.25/unit
of output
8
5
37
3
$40
$7.50
$47.50
$1.08/unit
of output
$.20/unit
of output
$1.28/unit
of output
$1.67/unit
of output
9
5
39
2
$45
$7.50
$52.50
$1.15/unit
of output
$.19/unit
of output
$1.34/unit
of output
$2.50/unit
of output
10
5
40
1
$50
$7.50
$57.50
$1.25/unit
of output
$.19/unit
of output
$1.44/unit
of output
$5.00/unit
of output
b. Price of labor is $5 per unit of labor.
c. Price of capital is $1.50 per unit of capital.
d. Diminishing marginal returns to labor begins upon hiring the fifth unit of labor since output increases
with hiring this unit of labor, but output increases at a diminishing rate.
e. When MC = AVC = $1.00/unit of output, then Q = 30 units of output.
f. When MC = ATC = $1.25/unit of output, then Q = 34 units of output. If P = MC = ATC then profits
should be equal to zero. To verify, calculate total revenue: TR = P*Q = ($1.25/unit of output)(34 units of
output) = $42.50. From the table find the TC of producing 34 units of output: TC = $42.50. The firm is
making zero economic profit.
g. When price of the good is $5, then the firm wants to equate price to its MC. So P = MC = $5 and the
firm will therefore decide to produce 40 units of output. Total revenue from producing 40 units of output
is equal to TR = ($5 per unit of output)(40 units of output) = $200. TC can be found in the table: TC of
producing 40 units of output = $57.50. Profit when producing 40 units of output is therefore equal to $200
minus $57.50, or profit is equal to $142.50.

5. Suppose a perfectly competitive firm has a total cost function that is equal to TC = q
2
+ 100q + 100.