Chapter 8, Problem 2E

To determine

(a)

To compute:

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

Answer to Problem 2E

Total Output	Cost	TFC	TVC	AFC	AVC	ATC	MC
0	$20	20	0
10	$40	20	20	2	2	4	2
20	$60	20	40	1	2	3	2
30	$90	20	70	0.66	2.33	3	3
40	$120	20	100	0.5	2.5	3	3
50	$180	20	160	0.4	3.2	3.6	6
60	$280	20	260	0.33	4.33	4.66	10

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 all throughout the production process; so, the TFC when the output is 0, at 0 level output total cost is 20, which implies that the TFC is 20.

TVC can be calculated by the following relation.

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

AFC:

AFC is calculated by dividing TFC with output.

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

AFC at 10 units,

  $\begin{array}{c}\text{AFC}=\frac{20}{10}\\ =2\end{array}$

AVC:

AVC is the average variable cost byoutput.

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

AVC at 10 units,

  $\begin{array}{c}\text{AVC}=\frac{20}{10}\\ =2\end{array}$

ATC:

ATC is the total cost by output.

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

ATC at 10 units,

  $\begin{array}{c}\text{ATC}=\frac{40}{10}\\ =4\end{array}$

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

MC= $\text{MC}=\frac{{\text{TC}}_{\text{2}}-{\text{TC}}_{\text{1}}}{\text{Change in output}}$

MC at 20^th unit is,

  $\text{MC}=\frac{60-40}{\begin{array}{c}20-10\\ =\frac{20}{10}\\ =2\end{array}}$

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.

To determine

(b)

To illustrate:

The graphical representation of cost curves.

Explanation of Solution

The graphical representation of cost curves is as shown below:

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.

To determine

(c)

To explain:

The quantity of output at which marginal cost equal average total cost and average variable cost.

Explanation of Solution

At output level 30 and 40, MC is equal to ATC; this is the minimum ATC point.

At 10 units and 20 units, MC is equal to AVC.

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.