Chapter 8, Problem 1.1P

To determine

The fixed cost, variable cost and the marginal cost of owning and operating a car.

Explanation of Solution

The fixed cost includes the monthly payments and the insurance cost as they are incurred even when the car is not driven.

The total fixed costs can be calculated as follows:

$\begin{array}{c}\text{Total fixed cost}=\text{Monthly payments}+\text{Insurance}\\ =331.50+120\\ =451.50\end{array}$

The total fixed cost is $451.50 per month.

The variable cost includes the cost of gasoline and the wear and tear cost.

The marginal cost of driving a car for a mile includes the cost of gasoline and the wear and tear cost which can be calculated as follows:

$\begin{array}{c}\text{Marginal cost}=\frac{\text{Change in cost}}{\text{Change in distance}}+\text{Wear and tear cost}\\ =\frac{2.60}{35}+0.20\\ =0.274\end{array}$

The marginal cost includes $0.274 or 27.4 cents per mile.

The total variable cost in driving 2,000 miles can be calculated as follows:

$\begin{array}{c}\text{Total variable cost}=\text{Marginal cost }\times \text{Distance}\\ =0.274\times 2,000\\ =548\end{array}$

Thus, the variable cost that incurred due to the travel is $548 in one way.

The decision to make the trip should be based on the variable cost which also includes the cost of wear and tear. The cost of depreciation is to be accounted as it reduces the value of the car.

Economics Concept Introduction

Fixed cost: The fixed cost is defined as the cost which is independent of the level of output or production of a firm.

Variable cost: The variable cost is defined as the cost which depends on the level of production or output of a firm.

Marginal cost: The marginal cost is defined as the additional cost that is incurred due to the production of an extra unit of output.