Question

What are the differences between linear and nonlinear cost functions? Give an example of each type.

Answer 1

Differences between linear and non linear cost fuction

Linear Cost Function	Non linear Cost Function
1. Linear Cost Function expresses cost as a straight line.	1. Nin linear cost function expresses cost as a curved line.
2. It presents a constant rate of change.	2. It does not represent a constant rate of change.
3. Linear Cost Function graph looks like a straight line	3. It looks like a curved line.
4. The distance between any two consecutive points must be same.	4. The distance between the two consecutive points will not increase or decrease at a same amount.
5. The fixed cost does not change for increase in quantity	5. In this fixed cost remain same upto certain quantity and changes for increase in quantity from that certain limit. This is a step wise fixed cost(Semi variable Cost ).

Examples of Linear and Non-Linear Cost Function:

Linear Cost Function

Qty	Fixed Cost*	Variable Cost	Total Cost
0	10,000	0	10,000
1	10,000	2,000	12,000
2	10,000	4,000	14,000
3	10,000	6,000	16,000
4	10,000	8,000	18,000
5	10,000	10,000	20,000

*Fixed Cost is constant.

Non-Linear Cost Function

Qty	Fixed Cost**	Variable Cost	Total Cost
0	10,000	0	10,000
1	10,000	2,000	12,000
2	12,000	4,000	16,000
3	12,000	6,000	18,000
4	14,000	8,000	22,000
5	14,000	10,000	24,000

** Fixed Cost is 0-1 - 10,000, 2-3 - 12,000 & 4-5- 14,000