Question

You are given the following cost functions:
TC=100+60Q-3Q2 +0.1Q3 TC = 100 + 60Q + 3Q2
TC = 100 + 60Q
1. Compute the average variable cost, average cost, and marginal cost for each function. Plot them
on a graph.
2. In each case, indicate the point at which diminishing returns occur. Also indicate the point of
maximum cost efficiency (i.e., the point of minimum average cost).
3. For each function, discuss the relationship between marginal cost and average variable cost and
between marginal cost and average cost. Also discuss the relationship between average variable
cost and average cost.

Answer 1

For first total cost function:

2nd TC curve

Answer 3) 3rd TC curve

0 10 80 40 20 Output 60 20 40

Now relationship

MC cuts both AVC & AC at its minimum

Minimum of MC is to the left of minimum of AVC &AC

Distance between bother AVC & AC continue to fall