Chapter 6, Problem 15P

To determine

Concept Introduction:

Fixed cost: It is a cost which is constant in the short run, it is not related to any change in the production of goods or service, it will be fixed disregarding of an increase or decrease in output.

Variable cost: This cost is directly proportional to the level of output produced, it increases with an increase in output and vice versa.

Marginal Cost (MC): It refers to the rate by which the total cost of produced goods changes when the production increases by a single unit. As the fixed cost is constant irrespective of production, so the marginal cost depends on the variable cost only in the short run. The marginal cost is calculated as follows:

Here,

• is the marginal cost.
  
• is the change in total cost
  
• is the change in quantity.
  

Average Total Cost: It is also referred as the cost of a single unit, it includes the overall cost, that is the variable cost as well as the fixed cost. A firm should always maintain the price of a product above the ATC, otherwise it will result in a loss for the firm. The formula for ATC is:

Here,

• AFC is the average fixed cost.
• AVC is the average variable cost.
• ATC is the average total cost.

Average fixed cost: This is the cost, which is constant for the firm irrespective of the output produced by the firm. So the AFC is a fixed cost per unit produced by the firm. It refers to the total fixed cost divided by the output.

Here,

• AFC is the average fixed cost
• TFC is the total fixed cost
• Q is the quantity of output.

Average variable cost: This is not a constant cost for the firm, it changes with a change in the output. Therefore, the AVC is a per unit cost of that variable inputs. It is calculated as follows:

Here,

• AVC is the average variable cost
• TFC is the total fixed cost
• Q is the quantity of output.