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Econ 3305

In: Business and Management

Submitted By Duvaleir
Words 2039
Pages 9
Q1: CH 8 (10%)
At a management luncheon, two managers were overheard arguing about the following statement: “A manager should never hire another worker if the new person causes diminishing returns.” Is this statement correct? If so, why? If not, explain why not.

The manager quoted in the passage above is incorrect. If the new worker causes diminishing returns, it means that she produces less than the worker hired before her. Let’s say that a restaurant hires workers at the rate of $80 per day. A chef, on average, can prepare 60 meals per day. If you can sell each meal for $10 and the other costs, (without calculating what the company pays for the chefs), are $5 per meal. Let’s say you hire an additional chef and she can prepare only 50 meals per day, that still increases the company’s profits by $170 ( (10-5)*50-80). The marginal contribution is diminishing; however the marginal product is still positive.
If the marginal contribution is diminishing it does not necessarily mean a company is not making money for that additional employee, but if the marginal product becomes negative it means for certain that the company will lose money if they hire an additional employee. The manager should still hire the employee even though the additional employee causes diminishing return.

Q2: CH 8 (20%)
Suppose that a firm is currently employing 10 workers, the only variable input, at a wage rate of $100. The average physical product of labor is 25, the last worker added 10 units to total output, and total fixed cost is $5,000
a. What is marginal cost?
The firm paid the last hired worker $100 and he produced 10 units. So, cost of producing the last unit (MC) is 100/10 = $10
b. What is average variable cost?
The firm hires 10 workers and pays them $100 each, so Total variable costs are 10*100 = 1000. On average, a worker makes 25 units, so total units are 25*30 = 750. So, the...

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