Question

Consider the following hypothetical example of a boat building firm. The total fixed cost is £100, irrespective of how many boats are produced. Total variable costs (TVC) will increase as output increases. Output Total variable cost(£) 50 2 80 100 - 4 Total fixed cost (£) 100 100 100 100 100 100 100 100 Total cost(£) 150 180 200 210 250 320 450 740 110 150 220 350 640 5 a. Plot the Total Cost (TC), Total Variable Cost (TVC), and Total Fixed Cost (TFC). b. Assuming that the firm is producing at minimum cost, show the areas for the total costs. C. Compute and plot the Average Total Cost (ATC), Average Variable Cost (AVC), Average Fixed Cost (AFC) and Marginal Cost (MC). d. Explain the relationship and significance of ATC, AVC, AFC and MC. [4 Marks)

Answer 1

Part A)

800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 10.00 0.00 2.00 4.00 6.00 8.00 Output +vC TC TFC

Part c)

Output	TFC	TVC	TC	AFC	AVC	AC	MC
1.00	100.00	50.00	150.00	100.00	50.00	150.00
2.00	100.00	80.00	180.00	50.00	40.00	90.00	30.00
3.00	100.00	100.00	200.00	33.33	33.33	66.67	20.00
4.00	100.00	110.00	210.00	25.00	27.50	52.50	10.00
5.00	100.00	150.00	250.00	20.00	30.00	50.00	40.00
6.00	100.00	220.00	320.00	16.67	36.67	53.33	70.00
7.00	100.00	350.00	450.00	14.29	50.00	64.29	130.00
8.00	100.00	640.00	740.00	12.50	80.00	92.50	290.00

• AFC = TFC/output
• AVC = TVC/output
• AC = TC/output
• $MC_{n} = \frac{TC_{n} - TC_{n-1}}{Output_{n} - Output_{n-1}}$

350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 10.00 0.00 2.00 4.00 6.00 8.00 Output AC MC AFC -AVC Cost

Part d)

• Initially the component of AFC is higher in the AC however as we go on increasing the output, the AFC goe on decreasing and the AVC goes on increasing therefore, the component of AVC increases in AC. This is reflected in how closer the AVC curve keeps getting to AC as we go on increasing the output
• MC initially keeps falling as we keep on increasing the output, the int reaches the minimum and after that it goes on increasing. AC is lowest when MC is lowest.