Question

Question 1

Mankiw, page 265, question 7. Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs. Calculate average fixed cost (AFC), average variable cost, (AVC) and average total cost (ATC) for each quantity. 

Note: Recall that

 • AFC = FC/Q

 • AVC = VC/Q

 • ATC = TC/Q or ATC = AFC + AVC where TC = FC + VC

 I. What is AFC when output is Q = 2?

 II. What is AVC when output is Q = 4?

 III. What is ATC when output is Q = 5?

 What is AFC when output is Q = 2? 

 What is AVC when output is Q = 4?
 What is ATC when output is Q = 5? 

Question 2 

What is the efficient scale of the painting company? 

Note: Recall that the efficient scale is the output level which minimizes ATC. 

• 2 houses 

• 3 houses 

• 4 houses 

• 5 houses

Mankiw, page 266, question 10. Consider the following table of long-run total costs for three different firms.

Quantity	1	2	3	4	5	6	7
Firm A	$60	$70	$80	$90	$100	$110	$120
Firm B	11	24	39	56	75	96	119
Firm C	21	34	49	66	85	106	129

 I. What does Firm A experience in the behavior of its average total cost? Economies of scale, diseconomies of scale, or constant returns to scale?

 II. What does Firm B experience in the behavior of its average total cost? Economies of scale, diseconomies of scale, or constant returns to scale? 

Note: Recall that economies of scale means ATC decreases as output Q increases, whereas diseconomies of scale means ATC increases as output Q increases.

Firm A _______ 

Firm B _______ 

Answer 1

Question 1. Refer the attached table

AFC = FC /Q

AVC = VC / Q

ATC = AFC + AVC

Using these formula we can determine the values.

From the above table we can see the ATC is minimum at Q = 4 houses.

Question 2. 4 houses.

Refer the attached table

From the above table we can see the ATC of firm A and C decreases with the increase in output upto a certain point and after that it starts increasing. While in case of Firm B the ATC is increasing in output.

Firm A and Firm C = Economies of scale

Firm B - Diseconomies of scale.