Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays them $20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student added 50 newspapers to total output
The cost of the capital the firm uses is fixed at $50 per shift. a. Is the newspaper operating in the long run or short run? Why? b. What is the average product of 5 students? c. Calculate the total fixed cost, total variable cost, and total costs of folding and bagging 300 newspapers. d. Calculate the average fixed cost, average variable cost, and average total costs of folding and bagging 300 newspapers. e. What is the marginal cost of one of the 50 newspapers folded and bagged by the fourth student?
a. The firm is operating in the short run because its capital cost is fixed.
b. Average product equals 300 ÷ 5 = 60 newspapers per shift.
c. Total fixed cost = $50, total variable cost = 5 × $20 = $100, and so total cost = $50 + $100 = $150.
d. Average fixed cost = $50 ÷ 300 = $0.17, average variable cost = $100 ÷ 300 = $0.33, and average total cost = $150 ÷ 300 = $0.50 (alternatively, average total cost = average fixed cost + average variable cost = $0.17 + $0.33 = $0.50).
e. Marginal cost = change in total cost divided by change in output, or $20 ÷ 50 = $0.40.
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