If you were going to pay each entrant to the study group $10 each: (a) What is t
ID: 1091987 • Letter: I
Question
If you were going to pay each entrant to the study group $10 each:
(a) What is the marginal cost of having Diane join the study group?
(b) What is the average variable cost of having Hilda join the study group?
(c) At which entrant does increasing returns end?
Show how you calculate your answers to (a) and (b). Explain your answer to (c).
Name
Entrant
Number
Total
Product
--------
0
0
Alice
1
5
Beth
2
12
Cathy
3
21
Diane
4
33
Elaine
5
46
Faye
6
57
Gladys
7
65
Hilda
8
72
Irene
9
77
Janice
10
80
Name
Entrant
Number
Total
Product
--------
0
0
Alice
1
5
Beth
2
12
Cathy
3
21
Diane
4
33
Elaine
5
46
Faye
6
57
Gladys
7
65
Hilda
8
72
Irene
9
77
Janice
10
80
Explanation / Answer
Marginal Cost is the cost of bringing in a new entrant. If we're paying each new entrant $10, then obviously the marginaly cost of bringing in Diane (a new entrant) will simply be $10.
The variable cost of acquiring Hilda means how much Hilda will cost. As we know this is $10. To find the average we must look at all the variable costs. But they're all $10, because acquiring any new entrant, is $10. So the average variable cost is $10.
Lastly: increasing returns means when you increase inputs by x % and output increases by more than x%. Eg. inputs rise from 1 to 2 (a 100% increase), and ouputs rise from 2 to 5 (a 150% increase) would be an instance of increasing returns. It occurs when Marginal Output (the output added by each worker) is increasing; therefore, it ends where Marginal Ouput STOPS increasing.
I've created a table to illustrate Marginal Output, so you can see for yourself where it stops increasing.
So after the 5th unit, Marginal Output stops rising, therefore increasing returns end after the 5th unit.
Hope it helps :)
Entrant Number Total Output Marginal Output 1 5 5 2 12 7 3 21 9 4 33 12 5 46 13 6 57 11 7 65 8 8 72 7 9 77 5 10 80 3