4-5AP, and MP given in Table 4.1 multiplied by the price of one unit of output ($3). The resulting TVP, AVP, and MVP values are shown in Table 4.2. Figure 4.1
4-6Table 4.2: TVP, AVP and MVP Inputs TP (Xi) (Yi) Total Value Product (TP * PYi) Average Value Product (AP * PYi) Marginal Value Product (MP * PYi) Total Factor Cost (Xi * PXi) 0 0 0 0 - - 1 5 15 15 15 $2 2 14 42 21 27 $4 3 21 63 21 21 $6 4 26 78 19.5 15 $8 5 30 90 18 12 $10 6 33 99 16.5 9 $12 7 35 105 15 6 $14 8 36 108 13.5 1 $16 9 36 108 12 0 $18 10 35 105 10.5 -1 $20 At five units of input, the TVP is 90 units, the AVP is 18 units and the MVP from the fifth unit is 12 units. Suppose it is given that the cost per unit of labour input is $2. The total factor cost (TFC) is simply the amount of labour input used multiplied by the cost per unit of labour input. The marginal factor cost (MFC) in this case is $2 (additional labour input used multiplied by cost per unit of labour input or 1 x $2). As cost per unit of input is constant, TFC is a straight line. Marginal factor cost is the cost of the last unit of input. As the cost of the first unit of input is the same as the fifth unit of input, $2, MFC is constant for all levels of input. The MFC curve is a straight line that is parallel to the horizontal axis. Graphically the copra outputs and costs as given above is presented in fig 4.2. The Y-axis is labelled value product and factor cost. The X-axis is labelled units of labour inputs. Using the graph of fig 4.2 we can determine graphically the optimum level of labour input to be used or the most profitable level of labour input that can be achieved. There are two possible approaches to determine this: one is the ‘Total’ Approach; and the other is the ‘Marginal Approach.
4-7Figure 4.2: Copra outputs and costs
4-84.2.1 The 'total" approach. We know that profit equals total revenue less total cost (I = TR - TC). This is the same thing as saying profit equals total value product less total factor cost (I = TVP - TFC). Where the difference between total value of product (TVP) and total factor cost is the greatest profit is maximise. If total factor cost exceeds the total value product, the result is a loss. In fig 4.2 there are two areas of labour input, that are labelled loss. This is where TFC exceeds TVP. A rational producer will not use labour input levels that will result in losses as indicated by loss zones in fig 4.2. There is a range of input usage between the two loss zones where TVP exceeds TFC. The copra producer will decide where in this range the optimum level of input lies or the point at which the most profitable level of labour input is reached. As profit is the difference between TVP and TFC, the greatest profit will be made at the point where their difference is the greatest. In fig 4.2 this is where the vertical distance between the TVP and TFC curves is the greatest. This corresponds to the optimum or the most profitable level of input to use. To determine the point to which there is the greatest difference between TVP and TFC, we draw a line parallel to TFC and tangential to TVP. Where the line