Question

Consider the following table of costs:

            Output             Total Variable Costs                 Total Costs

            0                                  $0                                $30

            1                                  20                                50

            2                                  30                                60

            3                                  48                                78

            4                                  90                                120

            5                                  170                              200

a) Plot the total fixed cost (TFC) curve, the total variable cost (TVC) curve, and the total cost (TC) curve on the same graph.

b) Briefly explain the reason for the shape of the cost curves in part (a).

c) Add to the above table new columns for the average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC).

d) On a new graph, plot the four cost curves from part (c). Discuss how the shapes of MC and AVC relate to MP_L and AP_L, respectively.

e) Briefly explain (you don’t need to actually do it) how the AFC, AVC, ATC, and MC curves can be derived geometrically.

Answer 1

a) In the diagram below, we have plotted output on the horizontal axis and TFC,TVC and TC on the vertical axis :

Cost 200 TVCOVA DE 180 160 140 120 loo -TFC 2 3 į 5 output

b) As fixed costs remain same at each output level, TFC curve is a straight line parallel to the horizontal axis.Total variable cost increases with increase in output, thus TVC curve is upward rising. Again, as TC increases with increase in output, TC curve is upward rising as well. As the difference between TVC and TC decreases with increase in output, TVC and TC curve comes closer to each other at higher output levels.

c) In the table below, we have calculated values of AFC, AVC, ATC and MC for the given output levels :

/ AVC ATC TC IAFC 1 Mei Toutputh TFCTVC 30 २० 30 50 665 । 30 18 330 ५४ 78 30 १० 120 | 75 22.5 30 42 30 170 200 34 40 80

d) In the diagram below, we have plotted output on the horizontal axis and AFC,AVC, ATC and MC on the vertical axis :

ATC AFC, AVC, MC MC ATC ХАҮс AFC 2 3 output 4 5