EBK MINDTAP ECONOMICS FOR BOYES/MELVIN'
EBK MINDTAP ECONOMICS FOR BOYES/MELVIN'
10th Edition
ISBN: 9781305387614
Author: MELVIN
Publisher: VST
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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.

Expert Solution & Answer
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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:

    QuantityTotal CostAverage Total CostMarginal 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 MR=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 MR=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.

  ATC=TCQ

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.

  MC=TCnTCn-1

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