Questions: The following table gives capital and labor requirements for 10 different levels of production. Q K L TC MC AC 0 0 0 0 - - 1 2 5 61 61.00 61.00 2 4 9 119 58.00 59.50 3 6 12 174 55.00 58.00 4 8 15 231 57.00 57.75 5 10 19 291 60.00 58.20 6 12 24 356 65.00 59.33 7 14 30 428 72.00 61.14 8 16 37 509 81.00 63.63 9 18 45 601 92.00 66.78 10 20 54 706 105.00 70.60 Assuming that the price of labor (PL) is 8 per unit and the price of capital (PK) is 20 per unit, we can compute total cost, marginal cost, and average cost for the firm. A. The average cost of production is initially decreasing with output but eventually increases. B. The marginal cost of production is initially decreasing with output but eventually increases. C. A and only. D. A and B only. E. The average cost of production is always greater than the marginal cost of production. Which of the following is true regarding the relationship between marginal cost and average cost? Using the number above, explain the meaning of marginal cost in terms of additional inputs needed to produce additional output.

The answer is D: A and B only.

Explanation for each option:

A. The average cost of production is initially decreasing with output but eventually increases.

• This statement is true. From the table, we can see that the average cost (AC) decreases from 61.00 at Q=1 to 57.75 at Q=4, and then it starts to increase, reaching 70.60 at Q=10. This behavior is typical due to economies of scale at lower levels of production and diseconomies of scale at higher levels.

B. The marginal cost of production is initially decreasing with output but eventually increases.

• This statement is also true. The marginal cost (MC) decreases from 61.00 at Q=1 to 55.00 at Q=3, and then it starts to increase, reaching 105.00 at Q=10. This reflects the typical behavior where initial production benefits from efficiencies, but as production increases, additional units become more costly to produce.

C. A and only.

• This option is incorrect because both A and B are true, not just A.

D. A and B only.

• This option is correct as both statements A and B are true.

E. The average cost of production is always greater than the marginal cost of production.

• This statement is incorrect. There are points in the table where the marginal cost is less than the average cost, such as at Q=3 where MC is 55.00 and AC is 58.00.

Meaning of Marginal Cost in Terms of Additional Inputs: Marginal cost (MC) represents the additional cost incurred to produce one more unit of output. It is calculated as the change in total cost (TC) when output (Q) is increased by one unit. In terms of inputs, marginal cost reflects the cost of the additional labor and capital required to produce that extra unit. For example, moving from Q=2 to Q=3, the total cost increases from 119 to 174, resulting in a marginal cost of 55.00. This increase in cost is due to the additional labor and capital needed to produce the third unit of output.