# Analyzing production costs - Fixed and Variable costs

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

https://brainmass.com/business/accounting/analyzing-production-costs-fixed-variable-costs-236811

#### 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.

Microeconomics

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm's output is $25. The cost of other variable inputs is $400,000 per day. Although you do not know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.

Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas:

? Total Variable Cost = (Number of Workers * Worker's Daily Wage) + Other Variable Costs

? Average Variable Cost = Total Variable Cost / Units of Output per Day

? Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day

? Worker Productivity = Units of Output per Day / Number of Workers

Then, assume that total fixed cost equals $3,000,000, and recalculate the values of the four variables listed above.

For both cases, calculate the firm's profit or loss.

For both sets of calculations, compare the firm's output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000?

For one of the cases, if the firm can operate at a loss in the short-run, how many employees need to be laid off in order for the company to break even? To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker. Given a lower number of employees now working at the company, what is the change in worker productivity? Is the change in worker too large, and the firm should shut down immediately? Or in your opinion, can the workers increase their productivity, assuming that the units of output per day remain fixed at 200,000 units, so that the firm operates at a break even state?

Provide a two to four page report to management of the firm that discusses what should be done.

Be sure to show your work to support the decision you outline in your report.