MC ATC AVC 0 2 4 6 8 10 OUTPUT (10.000s) Use this graph above, which illustrates
ID: 1153042 • Letter: M
Question
MC ATC AVC 0 2 4 6 8 10 OUTPUT (10.000s) Use this graph above, which illustrates costs per barrel of crude oil daily at a Nigerian oil field, to answer the questions below. a. What do total costs (TC) equal when 40,000 barrels are produced? b. When do total costs (TC) equal when 80,000 barrels are produced? c. What do total fixed costs (TFC) equal? d. What do total variable costs (TVC) equal when 40,000 barrels are produced? e. What do total variable costs (TVC) when 60,000 barrels are produced?Explanation / Answer
We use the following formula to give answer of the questions :
Total Cost = Average Total Cost (ATC) *Quantity
Total Fixed Cost = Total Cost - Total Variable Cost
Total Variable Cost = Average Variable Cost (AVC) * Quantity
Or
Total Variable Cost = Total Cost - Total Fixed Cost.
Let Quantity (Q) = output level.
Now use the values the values from graph to find out the solutions of these questions
a. Total Cost when 40,000 barrels are produced (Q = 40,000)
At Q = 4 (in 10,000s) the ATC is 3.5 as it touches the ATC at this point
So Total Cost (at Q = 40,000) = ATC * 40,000
And ATC is 3.5 at this Q
Total cost = 3.5 * 40,000 = $140,000
b. When Q = 80,000, ATC is 3 (from graph)
Total Cost (at Q= 80,000) = 3 * 80,000 = $240,000
Total Cost when 80,000 barrels are produced = $240,000.
c. Total fixed cost is same at all levels so let's take Q= 40,000 and at this level the
Total cost = 3.5 * 40,000 = $140,000
Total Variable Cost = AVC (at Q= 40,000)* Quantity
Total variable cost = 2 * 40,000 = $80,000.
Fixed cost = Total Cost - Total variable cost
Fixed cost = $140,000 - $80,000
Fixed cost = $60,000 at all levels of output.
d. Total Variable Cost = AVC * Quantity
Total Variable Cost (at Q= 40,000) = 2 * 40,000 = $80,000.
e. Total Variable Cost (at Q = 60,000) =
AVC (at Q = 60,000) * Q
Total variable cost = 1.5 * 60,000 = $ 90,000.
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