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# Analyzing production costs - Fixed and Variable costs

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A firm has fixed costs of \$60 and varable costs as indicated in the table below. Complete the table.

(a) Graph total fixed cost, total varable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the variable-cost and total-cost curves.

(b) Graph AFC, AVC ATC and MC. Explain the derivation and shape of each of these four curves and their relationshops to one another. Specifically, explain in non-technical terms why the MC curve intersects both the AVC and the ATC curves at their minimum points.

(c) Explain how the location of each curve graphed in Question 7(b) would be altered if (1) total fixed cost had been \$100 rather than \$60 and (20 total variable cost had been \$10 less at each level of output.

Total Total Total Variable Total Average Fixed Average Variable Average Marginal
Product FixedCost Cost Cost Cost Cost Cost
0 \$0
1 45
2 85
3 120
4 150
5 185
6 225
7 270
8 325
9 390
10 465

#### Solution Preview

Please refer attached file for complete solution. Graphs are missing here.

Solution:

Q TFC TVC TC=TFC+TVC AFC=TFC/Q AVC=TVC/Q ATC=TC/Q MC*
0 60 0 60
1 60 45 105 60.0 45.0 105.0 45.0
2 60 85 145 30.0 42.5 72.5 40.0
3 60 120 180 20.0 40.0 60.0 35.0
4 60 150 210 15.0 37.5 52.5 30.0
5 60 185 245 12.0 37.0 49.0 35.0
6 60 225 285 10.0 ...

#### Solution Summary

Solution describes the formula and steps to calculate TFC, TVC, TC, AFC, ATC, AVC and MC. It also explains the shape of these curves.

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