Exercise 1. 1) For a profit-maximizing firm, there is a difference between the short run and the long run. In both situations, the company wants to maximize profit: P = TR — TC (Skaggs, 2010). In the short run, such a firm should increase its output so long as the marginal revenue is greater than the marginal costs (Ibid). Production therefore is expanded only to the point where MR=MC, because after that point the profit begins to shrink. The major difference is that in the long-run, if the firm is struggling, it may produce even if MR
2) a) Give this chart
The point at which there are increasing returns is up until the 3rd laborer. The margin increase in productivity with the 3rd laborer is15 units. The marginal increase in productivity for the 4th laborer is 10 units, which is diminishing returns. So the 3rd worker is the point where increasing returns to labor exist.
This chart shows that the range where the marginal product is greater than the average product is between 2-3 laborers. At 1 these are the same, obviously. During this stretch, the marginal productivity is increasing. The average product is increasing during this stretch.
c) From 4-7 workers, average product is higher than the marginal product. The average product is, however, shrinking at this point., just not at a rate as fast as the marginal product is shrinking.
a) The marginal product of the 4th worker is 3 units, as production increases from 20 to 23 units with this worker.
b) The marginal product of the 2nd worker is 10 units as production jumps from 5 to 15 with the addition of the second worker.
c) To minimize costs, production should be at the level where marginal product is highest, which is at 2 workers. This is also the point at which the average cost is at its highest.
d) In this example, the principle of diminishing returns to labor very much applies. After the 2nd worker, the marginal product per new worker is decreasing, and the average product is also decreasing as a result. At worker 6, the company’s output is actually less than if it had 5 workers, so there are very much diminishing returns here.
Skaggs, N. (2010). Profit maximization. Department of Economics. Retrieved November 30, 2013 from http://economics.illinoisstate.edu/ntskaggs/readings/maximization.shtml
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