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Studying average and total cost curves

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Problem:

a.Given the following chart and information fill in the missing values.

Output TFC TVC TC MC AFC AVC ATC
0 $2,000 --
50 100
100 80
150 60
200 50
250 60
300 85
350 125

b. Please graph your results. Draw both the average and total cases making sure to explain these important relationships or trends in the curves:

In the AVG Cost Curves:
i) Shape of AVC as Q increase
ii) AVC and ATC and Q increases
iii) U-shape of AVC and ATC

In Total Cost Curves
i) Shape of TFC, TVC/TC
ii) TC and TVC as Q increases (note: TC = TVC + TFC  this tells you something about distance between the two curves)

c. In a typical LRAC curve like the illustration below, explain economies and diseconomies of scales as well as constant returns to scale. Make sure to use the graph and explain the concept.

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Solution Summary

Solution explains the formulas for calculating TFC, TVC, TC, MC, AFC, AVC and ATC. It also explains the shape and behavior of average and total cost curves. Economies/diseconomies/constant economies are also explained for long run average cost curve (LRAC).

Solution Preview

Please refer attached file for complete solution and better clarity of formulas and tables. Graphs are missing here.
Solution:
a. Given the following chart and information fill in the missing values.

Output TFC TVC TC MC AFC AVC ATC
0 $2,000 $0 $2,000
50 $2,000 $3,000 5000 60 $40 $60 100
100 $2,000 $6,000 8000 60 $20 $60 80
150 $2,000 $7,000 9000 20 $13 $47 60
200 $2,000 $8,000 10000 20 $10 $40 50
250 $2,000 $13,000 15000 100 $8 $52 60
300 $2,000 $23,500 25500 210 $7 $78 85
350 $2,000 $41,750 43750 365 $6 $119 125

1) TFC - It will remain $2000 for all production ...

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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