Question 1 Cost functions, a part of the definition of profit, are useful to gau
ID: 1152755 • Letter: Q
Question
Question 1 Cost functions, a part of the definition of profit, are useful to gauge the performance of the business. Suppose an economist estimated that the cost function of a single-product firm as: C(Q) = 10 + 10Q + 10Q2 + 10Q3 Based on this information, determine the followings and show all steps (first, you must define each of the terms in the cost function, and then plug in the numbers to have your answers; not just the answers): Hint: THE use of Graphs is recommended. a. Define fixed cost and offer an example. Next, compute the fixed cost of producing 20 units of output using the cost function above. b. Define variable cost and offer an example. Next compute the variable cost of producing 5 units of output using the cost function above. c. Define total cost and then compute the total cost of producing 5 units of output using the cost function above d. Define and compute the average fixed cost of producing 5 units of output e. Define and compute the average variable cost of producing 5 units of output f. Define and compute the average total cost of producing 5 units of output g. Define marginal cost an offer an example. Next, compute the marginal cost when Q = 5, using the cost function above
Explanation / Answer
a ) Fixed cost is that part of total cost which is constant and does not get effected by output. Fir example rent of a building is fixed no matter what ever output is produced there. Even if output is zero fixed cost is there.
According to the given cost function fixed cost of producing 20 units is 10.
b) variable cost is that part of total cost which varies with output produced. For example cost of input, more output will need more input and thus cost will change.
As per given cost function cost of producing 5 units is
50 + 250 + 1250 =1550
C ) Total cost is the sum of Fixed and variable cost.
Total cost of 5 units is
1550 + 10 =1560
D ) average fixed cost is
Fixed cost/ output
Afc for 5 units here is 10/5=2
E) average variable cost is
Variable cost/ output
Avc for 5 units here is 1550/5 =310
F ) average cost is per unit cost.
Total cost / output
For 5 units average cost is 1560/5 = 312
G) marginal cost is the additional cost incurred when one more unit of output is produced . For example if cost of producing 1 unit is 5 and 2 units is 9 then marginal cost is 4.
Marginal cost for 5 units in the example is
10 + 20(5) +30 (25) = 110 + 750 =860
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