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Lisa has a lawn-mowing business

Economics

Lisa has a lawn-mowing business. Lisa hires students at $40 a day to mow lawns. Lisa leases 5 lawn mowers for $200 a day. The table gives the daily output:

 

Labor Total product
0 0
1 20
2 44
3 70
4 94
5 114
6 120

a. Construct the total variable cost and total cost schedules,

b. Construct the average fixed cost, average variable cost, and average total cost schedules,

c. Construct the marginal cost schedule.

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a) The details of variable and fixed cost are

  • The wage rate is $40 per student and is a variable cost
  • The cost for lawn mowers for $200 a day is a fixed cost

Total variable cost = wage rate per labor * number of labor

Total Cost = Total variable cost + Total Fixed cost

 

Labor (a) variable cost per   labor (b) Total Variable   Cost (c=a*b) Total Fixed cost   (d) Total Cost (c+d)
0 $40.00 $0.00 $200.00 $200.00
1 $40.00 $40.00 $200.00 $240.00
2 $40.00 $80.00 $200.00 $280.00
3 $40.00 $120.00 $200.00 $320.00
4 $40.00 $160.00 $200.00 $360.00
5 $40.00 $200.00 $200.00 $400.00
6 $40.00 $240.00 $200.00 $440.00

 

b) The following formulas will be used to prepare the schedule

Average variable cost/ fixed cost / total cost at X = total variable cost / fixed cost / total cost at X / X

Where X is the total product quantity

 

Total   product Average Variable   Cost Average Fixed   cost Average Total   Cost
0 $0.00 $200.00 $200.00
20 $2.00 $10.00 $12.00
44 $1.82 $4.55 $6.36
70 $1.71 $2.86 $4.57
94 $1.70 $2.13 $3.83
114 $1.75 $1.75 $3.51
120 $2.00 $1.67 $3.67

 

c) The marginal cost schedule is prepared below.

 

Total   product Marginal product   (a) Total Cost Change in Total   cost (b) Marginal cost   (b/a)
0   $200.00    
20 20 $240.00 $40.00 $2.00
44 24 $280.00 $40.00 $1.67
70 26 $320.00 $40.00 $1.54
94 24 $360.00 $40.00 $1.67
114 20 $400.00 $40.00 $2.00
120 6 $440.00 $40.00 $6.67

 

Costs:

In accounting, the costs are booked and presented in their respective accounts head as cost of goods sold, operating expenses, non-operating expenses, administrative expenses, and selling expenses. In economics, the costs are presented as a variable, fixed, total, and marginal cost.