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PROBLEM SET 3
Problems for Chapter 6
- a. Complete the short-run cost schedule below by computing total cost, average fixed cost, average total cost, and marginal cost. SHOW HOW YOU CALCULATED ONE OF EACH. Output (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC) Average Fixed Cost (AFC) Average Variable Cost (AVC) Average Total Cost (ATC) Marginal Cost (MC) 0 $200 $ 0 -- -- -- -- 1 200 50 $ 2 200 90 45 3 200 120 40 4 200 160 40 5 200 220 44 b. Explain thoroughly the relationship between marginal cost and average variable cost. c. Given the following, find the total fixed cost and total variable cost for each level of output. Explain how you found them. Output (Q) Total Cost (TC) Total Fixed Cost (TFC) Total Variable Cost (TVC) 0 $ 40 1 60 2 75
- Jaynie owns a small shop and produces dining room sets. The table below presents data on expected short-run total costs at various output levels. Output (Q) Total Cost (TC) Total Fixed Cost (TFC) Total Variable Cost (TVC) Average Total Cost (ATC) Average Variable Cost (AVC) Marginal Cost (MC) 1 $100 $ 2 140 3 177 4 216 5 265 6 324 7 399 8 496 a. Complete the table above. b. At what output level is Jaynie’s average total cost at a minimum? c. At what output level are diminishing marginal returns (given the current plant size) confronted? d. Graph the firm’s average total cost, average variable cost, and marginal cost curves.
Output (Q) Total Cost (TC) Total Fixed Cost (TFC) Total Variable Cost (TVC) Average Total Cost (ATC) Average Variable Cost (AVC) Marginal Cost (MC) 1 $100 $50 $50 $100 $50 100 2 140 90 70 45 40 3 177 127 59 42.3 37 4 216 166 54 41.5 39 5 265 215 53 43 49 6 324 274 54 45.7 59 7 399 349 57 49.9 75 8 496 446 62 55.75 97 b. At Q = 5. c. Beyond Q = 3. d. You can do it!
Quantity (Q) Total Cost (TC) Total Variable Cost (TVC) Total Fixed Cost (TFC) Marginal Cost (MC) 3 $360 $210 $150 $ 6 600 450 150 100 STEPS: a. Read MC from graph. b. Read ATC from graph and then multiply ATC x Q to get TC. c. Read AVC from graph and then multiply AVC x Q to get TVC. d. TFC = TC – TVC.
TEXT #1 :
a. Q MC AFC AVC ATC 0 -- -- -- -- 1 $100 $1000 $100 $ 2 200 500 150 650 3 350 333.33 216.6667 550 4 550 250 300 550 5 800 200 400 600 b. 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1 2 3 4 5 Quantity $/unit MC ATC c. ATC is $550 at both 3 and 4 units. Note that ATC = MC at 4 units (ATC and MC cross at 4 units in the graph. TEXT #3 : a. Accounting Cost = 600+200+100= b. Economic Cost = 900+800= c. Accounting Cost (add rent to accounting costs in a)= 900 + 800 = 1700; Economic cost = 1700
TEXT #5 :
a. 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 0 10 20 30 40 50 60 70 80 90 100 110 Quantity of Output Average Cost Small Medium Large b. The medium size firm because its ATC is lowest. c. The large size firm because its ATC is lowest. d. Yes, as the firm increases output, it makes sense to move to a larger facility. Specifically, after (about) 35 units of output, the medium size firm results in lower ATC than the small firm. After 70 units of output, the large size firm has lower ATC than the medium firm.
