Production and Costs Homework #5

The following information that apply to Lisa's Cupcake Shoppe should be used to answer the questions.

Quantity of Labor (workers)	Quantity of cupcakes (TPP)	MPP	TVC	TFC	TC	MC	AVC	AFC	ATC
0	0
1	110
2	200
3	270
4	300
5	320
6	330

1. Lisa's Cupcake Shoppe is a small shop that sells cupcakes in a university town. Lisa owns three mixers. Her other inputs are ovens, flour, cupcake tins, frosting and of course, workers. She estimates that her daily production function when she varies the number of workers employed (and at the same time, of course, flour, frosting, etc.) is as shown in the accompanying table.
2. What are the fixed inputs and variable inputs in the production of cupcakes?
3. What is the marginal product of the first worker? The second worker? The third worker?
4. Why does marginal product decline as the number of workers increases?

1. The production for Lisa's Cupcake Shoppe is given in Problem 1. Lisa pays each of her workers $80 per day, including the costs of her other variable inputs. Her fixed cost is $100 per day.
   1. What is Lisa's variable cost and total cost when she produces 110 cupcakes? 200 cupcakes? Calculate the total variable cost (TVC) and total cost (TC) for every level of output given in Problem 1.
   2. What is the marginal cost per cupcake for the first 110 cupcakes? For the next 90 cupcakes? Calculate the marginal cost (MC) for all remaining levels of output.
   3. For each level of output, calculate the average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC) per cupcake.

1. a. What principle explains why the AFC declines as output increases? Explain your answer.

b. What principle explains why the AVC increases as output increases? Explain your answer.

c. How many cupcakes will be produced when ATC is minimized?

Source: Krugman, Wells, Graddy, Essentials of Economics, 3^rd edition

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FILE/KINGSTON/ECONOMICS/PRODUCTION AND COSTS HOMEWORK