CC105 Intermediate Microeconomics Theory 1 PDF

**CC105 -- Intermediate Microeconomics Theory 1** **Name: Raindzie Pearl B. Ang Year and Section: 3M-2** **MODULE 6: ISOQUANT AND ISOCOST CONCEPTS** At the end of the unit, you are expected to: 1\. Recognize the possible combination of inputs available for production to produce the desired level...

**CC105 -- Intermediate Microeconomics Theory 1** **Name: Raindzie Pearl B. Ang Year and Section: 3M-2** **MODULE 6: ISOQUANT AND ISOCOST CONCEPTS** At the end of the unit, you are expected to: 1\. Recognize the possible combination of inputs available for production to produce the desired level of output. 2\. Use the marginal rate of technical substitution (MRTS) to identify the ratio between inputs. 3\. Compute the total cost (TC) using the wage rate and interest rates 4\. Identify the optimal combination of inputs for the manager to achieve the target production level. Profit maximization is the primary objective of all firms. If in the short run, there are fixed and variable inputs in a perfectly competitive market, a single firm‟s Total revenue (TR) is fixed. Unless the firm can devise a process or technique to reach the minimum cost enough to produce the desired level of outputs, hence a profit-maximizing firm only option is to reduce cost. This module presents a rational discussion on how a perfectly competitive firm can identify the optimal combination of inputs to reach the minimum cost and yet maintain the desired level of output. The isoquant curve is the possible combination of two inputs that the firm used to produce the same level of output. Isoquant map is composed of two or more isoquant curves; the higher isoquant produces a higher level of outputs. Total cost is the cost a firm incurred which can be expressed as the sum of the product of wage and units of labor and interest rate and units of capital The marginal rate of technical substitution (MRTS) is the ratio between two inputs. It is also the slope of the isoquant. Isocost line depicts the possible combination of two inputs the firms can buy based on a fixed amount of resources. Not all days are created equal. Some days continuously rain. Similarly, in production, even how machines were correctly maintained, it breaks down. Also, workers sometimes call in sick and cannot report to work. Let us say that the manager has a production target, 100 units, and due to the flu season, several workers cannot report to work. Thus the manager has to substitute several stands by machines to cover for the lost productivity. On the other hand, there were delays in the arrival of specific spare parts, and the manager has to ask several workers for overtime as a substitute for several inoperable machines. In other words, the labor and machine are substitutable. For planning purposes, the manager created a table that depicts the possible combination of labor (L) and capital (K) that can produce a constant output. The Isoquant and the Marginal Rate of Technical Substitution -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- The table above depicts the possible combination of labor and capital that can produce an equal level of output. In this case, 100 units. Notice that in combination A, there were 45 units of labor and only one unit of capital. As the number of labor decreases, the manager needs more machines to compensate for the lost labor. For instance, there were 15 units of labor. To maintain 100 units of output, the manager needs to operate four units of capital. Further, if there were only two units of labor available, the manager needs to operate eight units of machines. The manager has to give up less and less labor in exchange for the constant increase in capital. The manager substitutes the units of the machine for specific units of labor. Likewise, the manager can also substitute units of labor with units of capital. The marginal rate of technical substitution (MRTS) is the absolute value of the slope of the isoquant curve. For instance, computing for the MRTS from D to E, we can use the formula: Thus substituting the values: Therefore in exchange for eight units of labor, the manager needs to operate an additional unit of capital. Inspecting table above for the MRTS, the manager needs to give up fewer and fewer units of labor in exchange for a constant increase in capital. This phenomenon is called the law of diminishing marginal rate of substitution. If the MRTS is equal to one, inputs are perfect substitutes. On the other side, a constant MRTS means that inputs are perfect complements. Depicted in the figure below is the isoquant, which is convex to the point of origin depicting the law of diminishing marginal rate of substitution. No description available. An isoquant depicts the possible combination of inputs that produce the same level of output. Illustrated in Figure 5.2 is the isoquant map, which has two or more isoquants. There are several characteristics of isoquants. Comparably Isoquant C produces more output compared to isoquant A and B. Isoquant has a negative slope, which means that as the manager employs more labor, there is less capital used. Isoquant does not intersect, which indicates that an isoquant only depicts a constant level of output. An intersecting isoquant means that the same level of input produces a different level of production.  For a more profound and meaningful understanding of the properties of an isoquant visit these web pages: The site provides a simple presentation of the isoquant, though interchangeably, the author also uses iso-product as a similar term for isoquant. ISOQUANT. Retrieved from In this site, the author traced through the use of graphs the mechanism of an isoquant. Also in a very comprehensive manner, the author succeeded in integrating the Cobb-Douglas theory in production and transition to the marginal rate of technical substitution (MRTS) Examples and exercises on isoquants and the marginal rate of technical substitution. Retrieved from Below is a hypothetical table for an Agricultural Firm. Isoquant Output ------------ -------- Isoquant A 500 Isoquant B 300 Isoquant C 100 Inputs MRTS 12 10 8 6 4 2 1 --------- ------ ----- ---- ---- ---- ---- ---- ---- Labor 120 108 98 90 84 80 78 77 Capital 1 2 3 4 5 6 7 8 Labor 100 88 78 70 64 60 58 57 Capital 1 2 3 4 5 6 7 8 Labor 90 78 68 60 54 50 48 47 Capital 1 2 3 4 5 6 7 8 1\. Complete the table above. 2\. Draw the three ISOQUANT curve **Isocost** Similar to a consumer, firms face constraints in their production. The cost of production serves as an obstacle for firms to increase their level of production. Thus a manager must work within the allocated resource. Mathematically it can be expressed as: Wherein w is the wage of labor, L is the number of labor units hired, r is the interest rate, and K is the number of capital units used. Thus, the total cost is the sum of the product of w and labor units hired and the interest rate and capital units used. Suppose that wage is P4 per unit and interest is P2 per unit if the manager hires 20 units of labor and 40 units of capital, how much is the total cost? The TC can be computed using the formula above: The firm incurred a cost of P160 for utilizing 20 units of labor and 40 unit capital. Shown in The table below is the possible combination of labor and capital the manager can hire and use for a fixed total cost of P160. Exclusively with P160, a manager can employ 40 labor units only, or it is possible to have a combination of labor and capital. For instance, with P160, the manager can hire ten labor units and 60 capital units. Computation of the Isocost -- -- -- -- -- -- -- -- -- -- -- -- The total cost is plotted in the figure below called the isocost line, which shows the possible combination of inputs, in this case, the labor and capital. If the manager decides to hire more labor, the labor cost increases while the cost of using capital decreases, in other words, since the cost of labor increases, there are few resources left to hire capital.  Also, all points A to E along the isocost is the possible combination of labor and capital that the manager can afford. Similarly, at combination F, the manager can afford the ten units of labor and 30 units of capital, incurring a total cost of 100 \[(4 x 10) + (2 x 30)\]. In other words, the manager has a budget surplus of P60. Contrary choosing combination G required a total cost of 220 \[(4 x 30) + (2 x 50)\], incurring budget deficit of P60. The manager wanted to minimize cost, and one useful technique is to determine the least-cost method of production is to construct the isocost lines. In the figure below, where three parallel isocost lines denote three isocost lines at the price of labor are P4 per unit, and the cost of capital is P2 per unit. The first isocost has 160; second with 240 and last with 320. The isocost is a straight line parallel to each other since the manager can purchase all inputs, labor, and capital at a constant price. No description available. The optimal combination of inputs The manager wanted to determine the minimum cost possible for producing the specific unit of outputs. By combining the isoquant and isocost, the manager can determine the optimal combinations of inputs to produce 100 units of output. Choosing the optimal combination of capital and labor inputs -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- Inspecting the table above, isoquant A produces less output, 75 units at any combination while isoquant B produces more production, 100 units. Later the isocost was drawn to depict two points common with the two isoquants. As a review, isocosts are combinations of labor and capital units in which at any point the TC are all equal. At point E, there were 15 units of labor and four units of capital used along the isoquant that produces 75 units a TC of P50. On the other hand, at point F, the isocost was tangent to the Isoquant B at an output of 100 units with the same TC of P50.  Therefore the point wherein the isocost is tangent to the isoquant is usually the optimal combination of inputs that has the minimum TC with the desired level of output. The following sites can assist in understanding a more profound concept of the isoquant and isocost curves. Isoquant and isocosts Retrieved from [https://www.economicshelp.org/blog/glossary/isoquant- and-isocosts/](https://www.economicshelp.org/blog/glossary/isoquant-%20and-isocosts/) Nipun S. Isoquant and Isocost Lines (With Diagram). Retrieved from [https://www.economicsdiscussion.net/isoquants/isoquant-and-isocost-lines-with-diagram- economics/25479](https://www.economicsdiscussion.net/isoquants/isoquant-and-isocost-lines-with-diagram-%20economics/25479) Exhibited in the table below are the two isoquants and the isocost for a hypothetical firm A B C D E F --------- ---- ---- ---- ---- ---- ---- Labor 40 28 18 10 4 0 Capital 1 2 3 4 5 6 Labor 80 38 28 20 14 10 Capital 1 2 3 4 5 6 +---------+---------+---------+---------+---------+---------+---------+ | Labor | 25 | 20 | 15 | 10 | 5 | 0 | | | | | | | | | | (P2/uni | | | | | | | | t) | | | | | | | +=========+=========+=========+=========+=========+=========+=========+ | Capital | 0 | 2 | 4 | 6 | 8 | 10 | | | | | | | | | | (P5/uni | | | | | | | | t) | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ In a single graph, please perform the following: A. Draw the Isoquant curve B. Draw the isocost C. Identify the optimal point which is tangent to the isoquant line. Please mark the spot as X. D. How many units of capital and labor is the optimal combination The optimal combination of labor and capital, based on the tangent point, is approximately 18 units of labor and 3 units of capital. Great learning! Shown in this module were the possible combinations of inputs that a firm can produce a constant level of the desired output. Also, there are several characteristics of indifference maps, such as the ICs are convex to the point of origin, nonintersection, and the principle of transitivity. The MRTS depicts the ratio between the two inputs the firms used. Moreover, the MRTS provide managers information to decide on the targeted ratio of the firm. On the other side, the isocost depicts the possible combination of inputs the firm can purchase based on the allocated fixed resources. Most notably, the combined isoquant and isocost advise the manager of the optimal combination of inputs that can produce the target level of output. Dorman, P., 2014. Microeconomics. Springer. Rader, T., 2014. Theory of microeconomics. Academic Press. Shephard, R.W., 2015. Theory of cost and production functions. Princeton University Press. **\ ** **CC105 -- Intermediate Microeconomics Theory 1** **Name: Raindzie Pearl B. Ang Year and Section: 3M-2** **Module 7: Production Theory and Estimation** 1\. Recognize the relationship between productivity and cost. 2\. Differentiate between fixed cost and variable cost. 3\. Apply the seven specific costs used in business analysis. 4\. Analyze the process of increasing productivity and reducing costs. You will recognize the association between input utilization and output production. Further, in the discussion, you will determine the optimal level of production. Also, you will differentiate short and long-run production decisions, economies of scale, and sustainable competitiveness. Finally, you will distinguish the Cobb-Douglas production function, which is a tool to determine output elasticities and used in managerial decisions. In this section, the most vital concept relevant to the study of production theory and estimation and to show in the learning objectives will be operationally defined to create a common frame of reference to how these concepts contribute to your future managerial career. *Average fixed cost* (AFC) is the quotient of total fixed cost and the total output *Average product* (AP) is the quotient of total product and the total produce output. *Average total cost* (ATC) is the quotient of total cost and the quantity produced. *Average variable cost* (AVC) is the quotient of the total variable cost and the total output *Depreciation* is the annual cost or expense of any asset (machinery, equipment) expected to be in use for more than a year. By dividing the production process into several specialized activities, each to be accomplished by a different worker is called division of labor. *Economic capacity* is the output which yields the minimum average total cost. *Economic profit* is the revenue greater than all costs including normal profits. *Law of diminishing return* states that as firms increase the variable input in the production, the process output will increase but, at some point, will diminish. *Marginal cost* is the additional cost firms incurred by producing another unit. *Marginal product* is the additional unit of product produced by adding another unit of input. *Normal profit* is the minimum profit firms must earn to keep that type of business. *Short-run* is a period in which inputs are variable and fixed. *Total cost* is the sum of the total fixed cost and total variable cost. The cost that remains constant regardless of the output level is known as the total fixed cost. The cost that increases or decreases depending on the level of output is called total variable cost. Managers decide the production process based on the two inputs, capital (K) and labor (L) to produce outputs (Q). Most production processes required machines and equipment, which the economist called capital and people (labor). Thus production is a function of capital and labor which can be expressed as: As a manager, you must determine the combination of inputs (K and L) to efficiently use in the production of the desired level of output. In the short-run, specific inputs are fixed, which constrained your choices. For instance, in the sanitary ware industry, it takes years to develop and mass-produce a new product. In the short-run, the capital is generally fixed. However, other inputs such as labor, steel, ceramics, rubbers can be adjusted, and these are the variable inputs. Thus the short-run production function can be written as: **The Production Function** -- -- -- -- -- -- -- -- -- -- -- -- Shown in the table above are the factors in the short-run production function with fixed capital (K\*). In producing 2,100 units of output, the firm needs to hire six (6) units of labor. With the available technology, a fixed level of capital it required seven (7) units of labor to produce 2,400 units of output. They are considering the short-run to produce more outputs required more labor inputs since increasing capital is not possible. In the long-run period, all inputs are variable. **Measuring Productivity** As a manager, you need to determine the productivity of input. It is useful in assessing the effectiveness of a production process to maximize profits. There are three crucial measures of productivity: total product (TP), average product (AP), and marginal product (MP). With a given amount of output, the maximum level of output a firm can produce is called Total Product. In the table above, employing five units of labor total product is 1,750 units. It is the maximum total product, five units of labor can produce. It is lower with less than maximum efforts. For average product, it is the average output each worker can produce if the produce is divided equally among the workers. It can be mathematically expressed as: There are instances that a manager is interested in the marginal product (MP) of each input. The MP is the change in the total product (TP) dived by a change in inputs (L). It can be expressed as: Shown in Table 6.1 is the MP of each worker, the first unit of labor produced 200 units, the second unit of labor contributed 250 (MP), but the two labor produced 450 units (Q). Notice that the MP of labor from 1 to 4 units is increasing but continuously declines from 5 labor units until the 11th labor unit has a negative MP. Naturally, the manager will notice that as they hire additional workers, some workers need to wait for their turn to use the fixed number of capital, and others might get in the way of other workers, thereby reducing their productivity.  **Phases of Marginal Product** Shown in the figure above is the relationship among total product, marginal product, and average product. Noticeably, that as the total product increases at an increasing rate with the input of labor also increases. Thus the marginal product continues to increase until it reaches TP equal to 1,350 and the MP equal to 500. The range over which MP is increasing is called the range of increasing marginal return. The MP reaches its peak at four units of labor. The firm continues to employ more labor units from 4th through the 10th unit; TP is still increasing but a decreasing rate. At this range, the MP is still positive but decreasing. This range is known as the decreasing marginal return. As the firm continues to hire more labor units 10th and 11th, the TP is decreasing, and the MP is zero and negative. This is the range known as a negative return. Please read the following articles below Pencavel, J.H., 2018. Diminishing Returns at Work: The Consequences of Long Working Hours. Oxford University Press. Daily PT Challenges: Law of Diminishing Returns. (24, April, 2020). Military.com Retrieved from [https://www.military.com/military-fitness/military-workouts/daily-pt-challenges-law- diminishing-returns] Loris, N. (26, April 2020). Coronavirus Is Helping the Environment---That\'s Not A Good Thing. The National Interest. Retrieved from [https://nationalinterest.org/blog/buzz/coronavirus-helping- environment%E2%80%94thats-not-good-thing-147916] Apply the marginal product and average product to depict the behavior of production in the short-run. Mark the three stages and explain why the first stage of production is the only rational stage for the firm. What is the role of the law of diminishing role? +-----------+-----------+-----------+-----------+-----------+-----------+ | Fixed | Variable | Change in | Output | Marginal | Average | | input | input | | | Product | product | | | | Capital | | | of Labor | | Labor | Capital | | | of | (APk) | | (given) 2 | (given) | | | | | | | | | | Capital | | | | | | | (MPk) | | +===========+===========+===========+===========+===========+===========+ | 2 | 0 | \- | 0 | \- | \- | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 1 | 1 | 30 | 30 | 30.0 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 2 | 1 | 120 | 90 | 60.0 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 3 | 1 | 310 | 190 | 103.3 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 4 | 1 | 520 | 210 | 130.0 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 5 | 1 | 670 | 150 | 134.0 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 6 | 1 | 740 | 70 | 123.3 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 7 | 1 | 790 | 50 | 112.9 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 8 | 1 | 810 | 20 | 101.3 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 9 | 1 | 820 | 10 | 91.1 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 10 | 1 | 830 | 10 | 83.0 | +-----------+-----------+-----------+-----------+-----------+-----------+ | 2 | 11 | 1 | 710 | -120 | 64.5 | +-----------+-----------+-----------+-----------+-----------+-----------+ Stage 1 is the most rational stage for a firm, because it has more efficiency in producing iron than in stage II levels when production plans are being multiplied several times, which creates economies of scale, profit maximization potential and resource utilization ratios. The law of diminishing are an important aspect of production theory which says that firms should operate in Stage I, as it explains the limitations on efficiency, resource allocation, and production planning. **Cost Function** Managers do not focus only on maximizing the benefits of the firm but also minimizing cost. The cost function is particularly valuable since it proves the vital information a manager needs to define the profit-maximizing level of output. Also, the cost function encapsulates information about the production process. Thus, the cost function offers information convenient for managers to process information and make optimal output decision easily. **Short-Run Cost** In the short-run, inputs are classified between variable and fixed inputs. In a short-run period, the manager needs to combine the optimal allocation of variable and fixed inputs to reached maximum-profit. The sum of all inputs is known as the total cost (TC), which in the short-run period is classified into the total fixed cost (TFC) and the total variable cost (TVC). Regardless of the desired level of output, the TFC remains constant. The TVC increases or decreases depending on the level of output. **The Cost Function** -- -- -- -- -- -- -- -- -- -- -- -- Illustrated in the table above are the costs a firm incurred in producing an output during the short-run period. Identifiable in the first two columns are the short-run production function that produces the maximum amount of output using the fixed cost (capital) and variable cost (labor). At any level of output, the capital cost is P50 per unit, and labor cost is P5 per unit. The calculated fixed and variable cost of production is reflected in the TFC and TFC column. In producing more output, the firm needs more variable inputs. For instance, to produce 50 units of output, the firm needs five units of capital and 20 units of labor. Thus at this level of output, the TFC is constant at P50, and TVC is P100. The sum of the TFC and TVC is the TC at P150. Depicted in the figure below are the graphical relations among TC, TVC, and TFC. Since TFC does not change in any level of output, it is a horizontal line, and the firm incurred TFC even if the output is zero units. On the other side, at zero levels of output, TVC is zero. The TVC is below the TC; the distance between the TC and TVC is equal to the TFC.  **Marginal and Average Cost** Managers have a misconception that large firms compared to small enterprises incurred a lower cost because they have the economies of scale advantage. It is a common belief that the cost is spread out over a large level of output. This concept is closely related to the economic concept of average fixed cost, which decreases as the output produced increases. The AFC is the quotient of TFC and output: In determining the variable cost on a per-unit basis, we can compute the average variable cost (AVC), which is the AVC dived by the number of units produced: Derivations of Average Total Cost -- -- -- -- -- -- -- -- -- -- -- -- -- -- Exhibited in the table above is an example of average variable cost, which initially declines until it reaches a minimum of 40 units of output and eventually started to increase. Also, ATC is similar to the AVC, wherein the minimum ATC is at 40 units. The ATC is the quotient of TC and the number of units produced: The ATC is also the sum of the AFC and AVC. However, the essential cost concept for the manager is the marginal cost (MC), which is the additional cost incurred by producing another unit of output. It is the quotient of the change in TC and change in Q. It is mathematically expressed as: In appreciating the MC concept, depicted in the table below, is the summary of the short-run function of the firm. Shown in the last column is the MC, which is the change in the TC divided by change in quantity produced. For instance, the TC continues to increase (P60 to P65) as the firm production increases from 10 to 20 units. Hence the MC is 0.5. Derivations of Marginal Cost -- -- -- -- -- -- -- -- -- -- **Relations among Cost** Depicted graphically in the figure below are the ATC, AVC, AFC, and MC. The shapes of the cost curves reveal the relations between the MC and AVC presented in the table above. The relations demonstrated are vital, especially the point where MC intersects ATC and AVC at their minimum points. It depicts that when the MC is less than ATC, the average total cost is decreasing, and when MC is greater than ATC, the average total cost is increasing. There is an explanation for this relation if in producing the additional unit its cost is higher than the average total cost, the new average total cost is increasing. In short, the new additional cost is the marginal contribution to the total cost. Secondly, the ATC and AVC curves get closer as output increases. This is due to the reason that AFC is the only difference in ATC and AVC. As the output increases, the AFC decreases, thus the gap between ATC and AVC also decreases. No description available. **Fixed and Sunk Cost** Recall that fixed cost foes not change with the increase or decrease of output. A related concept, the sunk cost, is an irrecoverable cost once it has been paid. Suppose that you are the manager of Clean-Well Company and paid P100,000 for a month\'s use of a warehouse. The rent expense is a fixed cost, regardless of the amount stored in the warehouse, the rent expense is the same. How much of the P100,000 is a sunk cost depends on the contract? If the contract does not permit the firm to recover any amount once paid, the total P100,000 is a sunk cost. If the contract states that the firm can be refunded P60,000 in the event the warehouse was not used, then the only P40,000 of the P100,000 in the fixed cost is a sunk cost. The amount of fixed cost that cannot be recovered is a sunk cost, which is irrelevant to the decision making. Suppose your firm decided to pay a non-refundable amount of P300,000 to rent a warehouse for one month. However, after the contract was signed, you realized that you do not need the facility, the production of sanitation ware is lower than you forested. XONMEX manager approaches you and offers to sublease the warehouse from you for P200,000. If the contract terms allow you to sublease the facility, should you accept XONMEX offer? You might answer NO since you might reason that your firm will appear to loose P100,000 by subleasing the facility for the only P200,000. This reasoning is wrong since your rent is nonrefundable, which means that the P300,000 is no longer recoverable. In this case, your most optimal decision is to accept the sublease offer that will provide you a cash flow of P200,000 that you probably will not get otherwise. If you sublease the facility, you will only lose P100,000. Clean-Well Company paid P200,000 to rent a warehouse from NEAR Logistics. Under the contract terms, P50,000 of the rent is refundable if the warehouse is returned within five days after the signing of contract. 1\. Upon signing the contract and paying P200,000, how high are the Clean-Well‟s fixed costs? Its sunk cost? Answer: [The fixed costs would be 200,000 PHP and its sunk cost would be 150,000 PHP if the warehouse is returned within five days.] 2\. Two days after signing the contract, Clean-Well realizes that it has no use for the warehouse. XONROX contacted Clean-Well and offered to sublease the warehouse from Clean-Well at a price of P155,000. Should Clean-Well accept XONROX offer? Answer: [Clean-Well should accept XONROX\'s offer to sublease the warehouse for P155,000, as it minimizes their losses compared to returning the warehouse.] **Long-Run Cost** As a manager, you are free to adjust the allocation of all inputs in a long-run cost. In a long-run period, all inputs are variable. Depicted in the figure below, the short-run average cost curve ATC0 is under the assumption that fixed factors existed in the production.  Long Run Average Total Cost The AVC output level Q0 with the TFC is at ATC0. If the firm decides to increase output to Q1, it is impossible to adjust fixed inputs; hence AVC rises to ATC (Q1). However, in the long-run, the firm can adjust all inputs. The firm is at ATC1 after adjusting fixed inputs in optimally the scale of operations. The firm pursues economies of scale in the production and can produce Q1 units lowering average cost, ATC1. However, ATC1 is still a short-run period based on adjusted fixed inputs to minimize production cost Q1. If the firm goal is to increase production to Q2, it will trace the ATC1 curve until it can adjust its fixed inputs to ATC2. The long-average cost LTAC depicts the alternative level of output for all variable inputs in the production. Please read the following articles below: Cropper, M., Raimi, D. & Wason, E.(21, April 2020). Lessons from 50 Years of the Clean Air Act, with Maureen Cropper. Resource. Retrieved from [https://www.resourcesmag.org/resources- radio/lessons-50-years-clean-air-act-maureen-cropper/](https://www.resourcesmag.org/resources-%20radio/lessons-50-years-clean-air-act-maureen-cropper/) Cox, J. (17, April 2020). Fed\'s Bullard proposes way to \'end the crisis\': Pay all costs for companies developing tests. CNBC. [https://www.cnbc.com/2020/04/17/feds-bullard-proposes-way-to-end- the-crisis-pay-all-costs-for-companies-developing-tests.html](https://www.cnbc.com/2020/04/17/feds-bullard-proposes-way-to-end-%20the-crisis-pay-all-costs-for-companies-developing-tests.html) A Clean-Well Store is located in a small town in Mindanao. It sells sanitation wares and is known for its low cost but quality wares. The manager Brad Constantine use to hire OJT from a well-known Technical School (TS). They stay for three to six months for business operation internship and go on to full-time employment in large stores in major cities in Mindanao. International Business College (IBC) and the St. Luke College (SLC) both produce highly competent business graduates, and Brad has discovered that productivity is higher if he hires interns from these schools instead of just one. Brad compiled over the past few years, the performance of the three groups of students. Labor 0 1 2 3 4 5 6 7 8 9 10 --------- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- TS 0 3 6 9 12 16 21 27 29 32 22 IBC 0 1 2 3 6 12 21 33 48 48 43 SLC 0 2 5 9 17 29 45 71 107 107 105 Capital 50 50 50 50 50 50 50 50 50 50 50 1\. What does the information convey to Mr. Constantine? Answer: [The information suggests that Mr. Constantine should prioritize hiring interns from IBC and SLC to boost productivity and improve the overall effectiveness of his store\'s operations.] 2\. What actions do Mr. Constantine has to consider improving his operation? Answer: [Mr. Constantine should enhance operations at the Clean-Well Store by diversifying hiring sources, partnering with IBC and SLC institutions, and implementing performance tracking. This will improve operational efficiency and ensure a steady influx of skilled interns.] Superb learning! In this module, the basic theory of production and cost was introduced. The short-run and the long-run production function have several measures of input productivity: average products and marginal products. These concepts are useful for managers to minimize costs and understand the bridge between production and cost. The topic continues to present graphical information of the cost function and the cost behavior in the long-run and short-run period. Ghai, O. and Gupta, A., 2002. Microeconomics Theory and Applications. New Delphi. Mahanty, A.K., 2014. Intermediate microeconomics with applications. Academic Press. Shone, R., 1975. Microeconomics: a modern treatment. Springer.