Suppose that when 2 units of labor,the only variable input into the production process,are hired,the total cost of production is $100 and that when 3 units of labor are hired the total cost of production is $120.In addition,assume that the variable cost per unit of labor is the same regardless of the number of units of labor that are hired.What is the firm's fixed cost?

Question

Quizplus · Accepted Answer

We know that the variable cost per unit of labor is the same regardless of the number of units of labor that are hired. Let's denote this variable cost per unit of labor as VC.

When 2 units of labor are hired, the total cost (TC) of production is $100. Thus:

TC = FC + (VC x 2) = $100

Similarly, when 3 units of labor are hired, the total cost (TC) of production is $120:

TC = FC + (VC x 3) = $120

We can subtract the first equation from the second equation to eliminate FC:

(VC x 3) - (VC x 2) = $120 - $100

Simplifying, we get:

VC = $20

Now we can substitute this value of VC into either of the original equations to solve for FC:

FC + (VC x 2) = $100

FC + ($20 x 2) = $100

FC = $60

Therefore, the firm's fixed cost is $60.

Suppose That When 2 Units of Labor,the Only Variable Input