The Average Physical Product

BUSINESS ECONOMICS

Answer 1)
This statement is not correct. In the stage of production, the point of diminishing
return is that point where the production of an additional unit would not lead to the economy
of scale and thus, it is advised to discontinue the increase in the input (Barnett & Morse,
2013). However, a manager can still employ a new worker if the wage rate is lesser than the
value of the marginal product. Further, if there is a reduction in the wage rates or there is an
increase in the value of the marginal products, the additional number of workers can still be
hired. It can be concluded that till the time the marginal returns obtain from hiring of workers
are more than the cost of such employment, workers can be hired by the managers.
Answer 2. a)
Marginal Cost = Wage Rate/ Average Physical Product
Marginal Cost = $ 100/ 25
Marginal Cost = $ 4
Answer 2. b)
In the given situation, the only variable input has been stated to be wage rate and
hence, the average variable cost per unit of product is $ 4.
Answer 2. c)
Total output being produced = Number of workers * Average Physical Product
Total output being produced = 25 workers * 10 units
Total output being produced = 250 units
Answer 2. d)
Average Total Cost = Average Fixed Cost + Average Variable Cost
Average Fixed Cost = $ 5000 / 250 units
Average Fixed Cost = $ 200 per unit
Average Total Cost = $ 200 + $ 4
Average Total Cost = $ 204
Answer 2. e)
At the current output rate, the average variable cost is constant at $ 4.

Answer 3.
Books produced by the last printer =8 books
Cost of printer $20,
Return per book for printers = $8/20 = $ 0.40
Last books added by the press = 2500
Cost of printing press = $ 5000
Return per press = 2500/5000 = $ 0.50
The publishing house is not making an optimal choice. This is because the return for
printers is lesser than the return per printing press. For the adjustment of the input usage, the
printing press must be increased and printer must be decreased, because the cost of latter is
more than the cost of the former to the company.
Answer 4.
The decision rule for the minimization of the cost is to make the choice of the inputs
in a way such that MPL/PL = MPK/PK.
In the given scenario, MPL/PL = 25/20 = 1.25
MPK/PK = 15/15 = 1
Since, MPL/PL ≠ MPK/PK, it can be stated that there is no efficiency in the
operations of the Beta Corporation. The efficiency can be increased by decreasing the usage
of the labour as against the increasing the amount of capital.
Answer 5.
It may not be economically efficient to move the productions to the foreign countries
even when there are lower wages. This is because in the countries like America where the
capital investment is more, the training level of the workers is also high and so the efficiency
of the production process. In contrast to this, while Mexico has lower wage rate, the workers
may not also be trained leading to high production cost and thereby not leading to economies
of scale.
Answer 6 a.
The Short Run Production function of the firm is Q = -4.33 + 0.91L

Yes, the parameter estimates have the appropriate algebraic signs, because there is a
positive correlation between L and Q.
Yes, these are statistically significant at the 5 per cent level as the P Value is near to
zero.
Answer 6 b.
The point at which the estimated marginal product begins to fall is when there is a fall
in the total product.
Answer 6 c.
The average product on the employment of 20 labors is = 13.87/20 = 0.6935.
The marginal product has been computed as follows.
Q at 19 L = -4.33 + 0.91*19
Q = 12.96
Q at 20 L = 13.87
MP = 13.87 – 12.96 = 0.91
Answer 6 d.
As the quantities are proportionately related to labor, it can be stated that and the
graph is showing an upward trend, it can be stated that in short run, the marginal cost (MC) is
rising.
Answer 7
A firm must shut down when the revenues are lower than the avoidable costs.
a) The firm must not shut down, because avoidable cost are $ 500 as against revenue $
1000.
b) The firm must shut down, because avoidable cost are $ 1001 as against revenue $
1000.
c) The firm must shut down, because avoidable cost are $ 1300 as against revenue $
1000.

Answer 8
Current Price = $ 8,00,000.00
Annual revenue stream = $ 50,000.00
Range of interest rate, less than or equal to = 50000/800000
Range of interest rate, less than or equal to = 6.25%
Answer 9
No, this view does not conflict with the senior managers actions of using the
corporate resources for the purpose of supporting the Ronald McDonald House projects. This
is because as the business functions with the involvement of various stakeholders, it has a
social responsibility to pay pack the benefits derived for the fulfillment of stakeholder interest
as well as the welfare of them (Schreck, Van Aaken & Donaldson, 2013). Ronald McDonald
House projects are on the lines of the charitable grants to the people and areas that are in need
of the same. May be in short run a business can succeed in achieving the desired profits and
success by not paying much interests to the needs of stakeholders, however in long run a
business entity cannot function in isolation and corporate social responsibility become a key
element for success and goodwill.

References
Barnett, H. J. & Morse, C. (2013). Scarcity and growth: the economics of natural resource
availability. UK: Routledge.
Schreck, P., Van Aaken, D. & Donaldson, T. (2013) Positive economics and the normativistic
fallacy: Bridging the two sides of CSR. Business Ethics Quarterly, 23(2), pp. 297-
329.