Theory of the Firm

[King112]

Hey guys,

I have an Econ test coming up, and I'm having some issues with theory of the firm. Its a math test, and the basic problem I'm having is that I cant really work out Average Revenue and Profit/Loss from a given table. Can anyone tell me the steps or formulas? 

Thanks
King112

PS: if it helps, here is the table

Edited February 10, 2015 by King112

[EconDaddy]

Hello,

 

The answer to your question is that it is not possible to calculate AR and Profit/Loss without knowing the price at which the output is sold. The table you attached only speaks about workers, output and various types of costs, but not revenue. Since profit = total revenue - total cost, we do not have enough info here.

 

See below descriptions of the costs.

• Total Fixed Cost (TFC): remains the same (that's why it's called fixed) no matter how much the output is. So in your case it's going to be 400 in every cell of the TFC column.

• Total Variable Cost (TVC): variable costs are costs a firm has to pay for any inputs that are variable (in the short-run labour is the only variable factor of production). That said, the TVC is based on how many workers are employed. Therefore, if your TVC is 800 with 4 workers, then it is 200 for every individual worker. So:
  • 0 workers: 0
  • 1 worker: 200
  • 2 workers: 400
  • 3 workers: 600
  • and so on.
• Total Cost (TC): TFC + TVC. So:
  • 0 workers: 400
  • 1 worker: 600
  • 2 workers: 800
  • 3 workers: 1000
  • and so on.
• Average Fixed Cost (AFC): This is calculated by dividing the TFC by the number of output (TFC/Q where Q is the output).
  • 0 workers: N/A
  • 1 worker: 400/10 = 40
  • 2 workers: 400/25 = 16
  • 3 workers: 400/45 = 8.89
  • and so on.
• Average Variable Cost (AVC): This is calculated by dividing the TVC by the number of output (TVC/Q where Q is the output).
  • 0 workers: N/A
  • 1 worker: 200/10 = 20
  • 2 workers: 400/25 = 16
  • 3 workers: 600/45 = 3.33
  • and so on.
• Average Total Cost (ATC): Shows the total cost attributable to one unit of output. There are 2 ways to calculate this: 

1. ATC = AFC + AVC
2. ATC = TFC/Q (where Q is the output)
   • 0 workers: N/A
   • 1 worker: 600/10 = 60 or 40 + 20 = 60
   • 2 workers: 800/25 = 32 or 16 + 16 = 32
   • 3 workers: 1000/45 = 22.22 or 8.89 + 13.33 = 22.22
   • and so on.

• Marginal Cost (MC): This can be calculated by dividing the change in TC by the change in Output. If output is increased by 1 unit, it shows how much TC changed as a result of producing one more unit (i.e. the additional cost needed for the production of that unit). In your table output increases by more than 1 so here is how it looks like:
  • 0 workers: N/A
  • 1 worker: (600-400)/(10-0) = 200/10 = 20
  • 2 workers: (800-600)/(25-10) = 200/15 = 13.33
  • 3 workers: (1000-800)/(45-25) = 200/20 = 10
  • and so on.

Hope this clarifies everything. Let me know if you were given a value for the price, because in that case we can indeed calculate revenues and profit/loss.

 

All the best,

EconDaddy

Edited February 10, 2015 by EconDaddy

[King112]

Thank you so much!  This is the only thing left on the question, if that is what you meant by price. Thank you, everything else has been cleared up

[EconDaddy]

Hi,

 

Nope, these are the fixed (4 machines x $100) and variable (no. of workers x $200) costs. The price is how much each unit of output is sold for. If you don't have that, we cannot work out revenue (as revenue is P x Q) and profit (total revenue - total costs OR (P-ATC) x Q).

 

Let me know how you are getting on with this.

 

Thanks,

EconDaddy

[King112]

Ok, thank you so MUCH!

You've really helped me a lot!

[EconDaddy]

Hey,

 

You are more than welcome. Feel free to contact me with any IB econ related questions.

 

Cheers,

EconDaddy