Chapter 28, Problem 1E

To determine

To explain:

The meaning of huge fixed costs and near-zero marginal cost with respect to average-total-cost curve.

Explanation of Solution

In the initial stage, the fixed cost is high whereas the marginal cost is almost zero, as the price for creating the initial unit of a product is high and the cost of producing additional unit is low. This is due to the cost incurred for the research and development of the product.

This can be understood through a table:

Quantity	Total Cost	Average Total Cost	Marginal Cost
$0$	$10,000$
$1$	$10,020$	$10,020$	$20$
$2$	$10,038$	$5,019$	$18$
$3$	$10,048$	$3,017$	$10$

It is also known that; equilibrium point is determined where $\text{MR}=\text{MC}$. Due to high cost in initial stage and nearly zero in the subsequent additional units, it can be said that the price is not able to cover the average total cost which means huge fixed costs which are incurred in the initial stage cannot be recovered at the equilibrium price which is $\text{MR}=\text{MC}$, as it is nearly equal to zero.

Economics Concept Introduction

Average total cost curve:

This curve represents the relationship between the two variables that are average total cost and the quantity of product produced in short run. The average total cost curve declines with the increase in production.

It is calculated by dividing the total cost of production with the amount of quantity produced.

  $\text{ATC}=\frac{\text{TC}}{\text{Q}}$

Where, TC is total cost of production and Q represents the quantity produced.

Marginal Cost:

It is the change in the total cost of production due to increase in production by one additional unit.

  $\text{MC}={\text{TC}}_{\text{n}}-{\text{TC}}_{\text{n-1}}$