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Cost Estimation

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A firm has total fixed costs of $60 and average variable costs as indicated in the table below.

Total Output Average Variable Cost

0 $0

1 45.00

2 42.50

3 40.00

4 37.50

5 37.00

6 37.50

7 38.57

8 40.63

9 43.33

10 46.50

a) Calculate AFC, ATC, MC, and TC.

b) At a product price of $56, will this firm produce in the short run? Why or why not? If it is preferable to produce, what will be the profit-maximizing output? What economic profit will the firm realize at the profit-maximizing?

c) How are your answers of the question b) changed if the price changed to $41?

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Solution Summary

The solution describes the steps to calculate AFC, ATC, MC, and TC. It also calculates economic profits at the given market price levels.

Solution Preview

Please refer attached file for better clarity of table.

Q AVC TVC=AVC*Q FC TC=FC+TVC AFC=FC/Q ATC=TC/Q MC*
0 0.00 0.00 60.00 60.00
1 45.00 45.00 60.00 105.00 60.00 105.00 45.00
2 42.50 85.00 60.00 145.00 30.00 72.50 40.00
3 40.00 120.00 60.00 180.00 20.00 60.00 35.00
4 37.50 150.00 60.00 210.00 15.00 52.50 30.00
5 37.00 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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