Question 1 (a) Use the following table to compute the marginal product, the average product, the marginal

cost, and the average total cost. Answer: :Q Labour (Units) : TP Output (Units) : TP/ QL : TP/QL Marginal product (Units) 1 2 3 4 5 6 7 8 9 10 50 125 225 350 450 525 575 600 600 560 50 75 100 125 100 75 50 25 0 -40 : TFC+TVC : TC/ Q Total Cost (RM) : TC/Q Average Total cost (RM) 1100 600 433.3 350 300 266.6 242.8 225 211.1 200

Average Product (Units) 50 62.5 33.3 87.5 90 87.5 82.1 75 66.6 56

Marginal Cost (RM)

1100 1200 1300 1400 1500 1600 1700 1800 1900 2000

100 100 100 100 100 100 100 100 100 100

Question 1 (b) At what level of output does the law of diminishing return begin to set in? Answer: Its marginal product (MP) initially rises until it reaches a certain maximum level which the MP will fall. So, the law of diminishing is level 4 to level 8.

Question 2 A firm making ice cream uses labour and capital as its inputs and there are three (3) different production techniques, as show in the table that it can choose from to produce this ice cream. Assume the wage rate or the price of labour is RM200 per week and the rental or the price of capital is RM400 per week. Question 2 (a) Calculate the total cost for each level of output using the three (3) different production techniques. L=TVC x RM200, K=TFC x RM400; Answer: i. Technique A Output (Units) 0 4 5 6 7 L=Total variable cost/ TVC (RM) 0 8200 11800 17000 24000 K=Total fixed cost/ TFC (RM) 400 2000 2400 2800 3200 Total Cost TC (RM) 400 10200 14200 19800 27200

ii.

Technique B Output (Units) 0 4 5 6 7 L=Total variable cost/ TVC (RM) 0 3600 4800 6600 9000 K=Total fixed cost/ TFC (RM) 400 6400 8800 11600 15200 Total Cost/ TC (RM) 400 10000 13600 18200 24200

iii.

Technique C Output (Units) 0 4 5 6 7 L=Total variable cost/ TVC (RM) 0 3200 4000 4800 5800 K=Total fixed cost/ TFC (RM) 400 7600 10000 12800 16000 Total Cost/ TC (RM) 400 10800 14000 17600 21800

Question 2 (b) For each level of output, state which techniques should be used by the firm Answer: - At level 4, the firm should used the technique B - At level 5, the firm should used the technique B - At level 6, the firm should used the technique C - At level 7, the firm should used the technique C

Question 2 (c) Suppose the price of labour increases to RM300 per week. State which techniques should be used by the firm for each output level and calculate the total cost of the chosen production technique. Answer:

L=TVC x RM300, K=TFC x RM400;

i.

Technique A Output (Units) 0 4 5 6 7 Total variable cost/ TVC (RM) 0 12300 17700 25500 36000 Total fixed cost/ TFC (RM) 400 2000 2400 2800 3200 Total Cost/ TC (RM) 400 14300 20100 28300 39200

ii.

Technique B Output (Units) 0 4 5 6 7 Total variable cost/ TVC (RM) 0 5400 7200 9900 13500 Total fixed cost/ TFC (RM) 400 6400 8800 11600 15200 Total Cost/ TC (RM) 400 11800 16000 21500 28700

iii.

Technique C Output (Units) 0 4 5 6 7 Total variable cost/ TVC (RM) 0 4800 6000 7200 8700 Total fixed cost/ TFC (RM) 400 7600 10000 12800 16000 Total Cost/ TC (RM) 400 12400 16000 20000 24700

For each level of output, the techniques should be used by firm: - At level 4, the firm should used the technique B - At level 5, the firm should used the technique B & C - At level 6, the firm should used the technique C - At level 7, the firm should used the technique C

Question 3 Production at Julias call center shows the following relationship between the number of workers and the number of phone calls (per day). Quantity of Variable Input: Labour 0 1 2 3 0 100 180 240 Quantity of output: Calls Marginal Return to Additional Labour 0 100 80 60 50 50 50 50 0 80 160 240 50 130 210 290 Fixed Cost (RM) Variable Cost (RM) Total Cost (RM)

Question 3 (a) Calculate the marginal return gained from the addition of each worker, filling in the column in the table. - Marginal return to additional labour = quantity of output Question 3 (b) Suppose Julie has entered a long term least for an office space and telephones, and this is her only fixed cost. The least costs her RM50 (per day). Fill in the fixed cost column in the table. - Fixed cost = RM50 Question 3 (c) Julia pays each worker she hires RM80 per day, and this is her only variable cost. Fill in the variable cost column in the table. - Variable cost = Quantity of labour x RM80 Question 3 (d) Fill in the column for the total cost corresponding to each level of production. - Total cost = Fixed cost + Variable cost