QUESTION: Production Cost I

The cost information for a firm is given by the following table. Assume that labor is paid a constant wage and capital is paid a constant price, i.e., this firm is a price-taker both in the labor and capital markets.

Note: L is labor; K is capital; Q is output; VC is variable cost; FC is fixed cost; TC is total cost; AVC is average variable cost; AFC is average fixed cost; ATC is average total cost; MC is marginal cost; and MPL is the marginal product of labor.

1. When the output is zero, why does the firm still incur costs in the short run? What is the fixed cost of this firm? Briefly explain.
2. What is the wage rate? What is the price of a unit of capital?
3. Please complete the above table with specific numbers (compute your answer to the nearest tenth?).
4. At what level of output and labor usage does marginal cost attain its minimum?
5. At what level of output and labor usage is AVC at its minimum?
6. At what level of output and labor usage is ATC at its minimum?
7. At what level of labor usage does the law of diminishing returns first occur?
8. As output increases, why does AVC first decrease but then eventually increase? Please explain your answer.
9. Suppose the price of output is $18. Fill in the following table using the information you gathered in the previous table.
   
10. At what production level does the firm get its maximum profit? Please explain your answer.

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