Chapter 9, Problem 3RQ

Subpart (a):

To determine

Calculate different costs.

Explanation of Solution

Total cost (TC) can be obtained by using the following formula.

$\text{Total cost}=\text{Total fixed cost}+\text{Total variable cost}$ (1)

Total cost at production level 1 unit can be calculated by substituting the respective values in Equation (1).

$\begin{array}{c}\text{Total cost}=60+45\\ =105\end{array}$

Total cost is $105.

Average fixed cost (AFC) can be obtained by using the following formula.

$\text{Average fixed cost}=\frac{\text{Total fixed cost}}{\text{Quantity}}$ (2)

Average fixed cost at production level 1 unit can be calculated by substituting the respective values in Equation (2).

$\begin{array}{c}\text{Average fixed cost}=\frac{60}{1}\\ =60\end{array}$

Average fixed cost is $60.

Average variable cost (AVC) can be obtained by using the following formula.

$\text{Average variable cost}=\frac{\text{Total variable cost}}{\text{Quantity}}$ (3)

Average variable cost at production level 1 unit can be calculated by substituting the respective values in Equation (3).

$\begin{array}{c}\text{Average variable cost}=\frac{45}{1}\\ =45\end{array}$

Average variable cost is $45.

Total average cost (AC) can be obtained by using the following formula.

$\text{Total average cost}=\frac{\text{Total cost}}{\text{Quantity}}$ (4)

Total average cost at production level 1 unit can be calculated by substituting the respective values in Equation (4).

$\begin{array}{c}\text{Total average cost}=\frac{105}{1}\\ =105\end{array}$

Average variable cost is $105.

Marginal cost (MC) can be obtained by using the following formula.

$\text{Marginal cost}=\frac{{\text{Total cost}}_{\text{present}}-{\text{Total cost}}_{\text{previous}}}{{\text{Quantity}}_{\text{present}}-{\text{Qunantity}}_{\text{previous}}}$ (5)

Average variable cost at production level 1 unit can be calculated by substituting the respective values in Equation (5).

$\begin{array}{c}\text{Average variable cost}=\frac{105-0}{1-0}\\ =105\end{array}$

Marginal cost is $105.

Table-1 shows the total cost, average fixed cost, average variable cost, average total cost and marginal cost that obtained by using equations (1), (2), (3), (4) and (5).

Table -1

Quantity	Fixed cost	Variable cost	TC	AFC	AVC	AC	MC
0	60	0	60
1	60	45	105	60	45.00	105.00	45
2	60	85	145	30	42.50	72.50	40
3	60	120	180	20	40.00	60.00	35
4	60	150	210	15	37.50	52.50	30
5	60	185	245	12	37.00	49.00	35
6	60	225	285	10	37.50	47.50	40
7	60	270	330	8.57	38.57	47.14	45
8	60	325	385	7.50	40.63	48.13	55
9	60	390	450	6.67	43.33	50.00	65
10	60	465	525	6	46.50	52.50	75

Figure -1 illustrates the shape of total fixed cost, total cost and total variable cost that influencing by the diminishing returns to scale.

In figure -1, horizontal axis measures total output and vertical axis measures cost. The curve TC indicates total cost and the curve TVC indicates total variable cost. TFC curve indicates total fixed cost. Since total fixed cost is remain the same over the different level of production TFC curve parallel to the horizontal axis.

From the output range 1 unit to 4 units, total cost and total variable cost increasing at decreasing rate due to the increasing marginal returns. Thereafter, these two cost curves are increasing at increasing rate due to the diminishing marginal cost.

Economics Concept Introduction

Concept introduction:

Fixed cost: Fixed costs refer to those costs that remain the same regardless of the level of production.

Variable cost: Variable cost refers to the costs that change due to the changes occurring in the level of production.

Subpart (b):

To determine

Calculate different costs.

Explanation of Solution

Figure -2 illustrates relationship between marginal cost, average variable cost, average fixed cost and average total cost curve.

In figure -2, horizontal axis measures total output and vertical axis measures cost. The curve TC indicates total cost and the curve TVC indicates total variable cost. TFC curve indicates total fixed cost. Since total fixed cost is remain the same over the different level of production TFC curve parallel to the horizontal axis.

Since the fixed cost is spread over all the output, increasing the level of output leads to reduce the average fixed cost over the increasing production. Marginal cost curve average variable cost curve and average total cost curve are U shaped due to the operation of economies of scale and diseconomies of scale.

Average total cost curve is the vertical summation of average fixed cost and average variable cost. When the marginal cost curve is below to the average total cost curve, then the average total cost falls. When the marginal cost lies above the average total cost curve then the average total cost curve start rises. Thus, marginal cost curve intersects with the average total cost curve at the minimum point.

When the marginal cost curve is below to the average variable cost curve, then the average variable cost falls. When the marginal cost lies above the average variable cost curve then the average variable cost curve start rises. Thus, marginal cost curve intersects with the average variable cost curve at the minimum point.

Economics Concept Introduction

Concept introduction:

Fixed cost: Fixed costs refer to those costs that remain the same regardless of the level of production.

Variable cost: Variable cost refers to the costs that change due to the changes occurring in the level of production.

Subpart (c):

To determine

Fixed cost and variable cost.

Explanation of Solution

The increasing fixed cost from $60 to $100 leads to shifts the fixed cost curve upward (By $40). This increasing fixed cost does not affect the marginal cost. Thus, marginal cost curve and average variable cost curve remains the same.

The decrease in variable cost by $10 leads to reduce the marginal cost $10 at first level of output and remains the same for other level of output. Average total cost and average variable cost decreases as a result of decrease in the variable cost. But, average fixed cost remains the same.

Economics Concept Introduction

Concept introduction:

Fixed cost: Fixed costs refer to those costs that remain the same regardless of the level of production.

Variable cost: Variable cost refers to the costs that change due to the changes occurring in the level of production.