Chapter 8, Problem 1E

To determine

To compute:

The value of TFC, TVC, AFC, AVC, ATC and MC.

Answer to Problem 1E

Total Output	Costs	TFC	TVC	AFC	AVC	ATC	MC
0	100	100	0
1	150	100	50	100	50	150	50
2	225	100	125	50	62.5	112.5	75
3	230	100	130	33.33	43.33	76.67	5
4	300	100	200	25	50	75	70
5	400	100	300	20	60	80	100

Explanation of Solution

TFC is the total fixed cost, TVC is the total variable cost, AFC is the Average fixed cost, AVC is the average variable cost, ATC is the average total cost and MC is the marginal cost.

TFC is constant throughout the production process; so, the TFC could be find when the output is 0.At 0 level of output, total cost is 100, which implies that the TFC is 100.

TVC is calculated by the following relation:

  $\begin{array}{l}\text{Costs}=\text{TFC}+\text{TVC}\\ \text{TVC}=\text{Costs}-\text{TFC}\end{array}$.

AFC is calculated by dividing TFC with output.

  $\text{AFC}=\frac{\text{TFC}}{\text{Q}}$

Therefore, AFC at 2^nd unit is,

  $\begin{array}{c}\text{AFC}=\frac{100}{2}\\ =50\end{array}$

Average variable cost is calculated by dividing TVC with output.

  $\text{AVC}=\frac{\text{TVC}}{\text{Q}}$

AVC at 2^ndunit,

  $\begin{array}{c}\text{AVC}=\frac{125}{2}\\ =62.50\end{array}$

ATC is the total cost by output.

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

ATC at 2^nd unit,

  $\begin{array}{c}\text{ATC}=\frac{225}{2}\\ =112.50\end{array}$

MC is the change in total cost per an additional unit.

  $\text{MC}=\text{TC2}-\text{TC1}$

MC at 3^rd unit,

  $\begin{array}{c}\text{MC}=\text{TC3}-\text{TC2}\\ =230-225\\ =5\end{array}$

Economics Concept Introduction

Total fixed cost:

The cost incurred by a firm which remains constant irrespective of level of output.

Total variable cost:

The cost incurred in producing units of output which varies with the production level.

Total cost:

The sum of total variable cost and total fixed cost is referred as total cost.

Marginal Cost:

The additional cost of producing an extra unit of output is referred to as the marginal cost of producing that unit of output.

Average cost:

It is the cost of per unit of output produced. It is calculated by dividing total cost with variable units of output.

Average fixed cost:

It is the fixed cost divided by units of output.

Average variable cost:

It is total variable cost divided by units of output.