Consider the following information about baseball production at Bobby's Baseball Factory:
Bobby pays all his workers the same wage,and labor is his only variable cost.From this information we can conclude that Bobby's average variable cost decreases
A) as output rises from 0 to 10, but rises after that.
B) as output rises from 0 to 26, but rises after that.
C) as output rises from 0 to 33, but increases after that.
D) continually as output rises.

Question

Consider the following information about baseball production at Bobby's Baseball Factory: 
Bobby pays all his workers the same wage,and labor is his only variable cost.From this information we can conclude that Bobby's average variable cost decreases
A) as output rises from 0 to 10, but rises after that. 
B) as output rises from 0 to 26, but rises after that. 
C) as output rises from 0 to 33, but increases after that. 
D) continually as output rises.

Quizplus · Accepted Answer

According to the information given, Bobby's variable cost is labor cost which is assumed to be constant, therefore the average variable cost per unit will decrease as output rises until the point where the fixed cost is spread over enough units to lower the average variable cost. At that point, the average variable cost will start to increase. The point where the average variable cost is at its minimum is called the point of diminishing returns. In this case, the point of diminishing returns is at 26 units of production, so Bobby's average variable cost will decrease as output rises from 0 to 26 but will rise after that. Therefore, the correct answer is B.

Consider the Following Information About Baseball Production at Bobby's Baseball