a) What is the Fixed Cost of production (recall that it does not vary with outpu
ID: 1163566 • Letter: A
Question
a) What is the Fixed Cost of production (recall that it does not vary with output)
b) Calculate and graph (on the next page) Average Variable Cost, Average Fixed Cost, Average
Total Cost, and Marginal Cost.
Q VC TC
10 500 3000
20 800 3300
30 1350 3850
40 2300 4800
50 3750 6250
60 6000 8500
70 9450 11950
c) Explain why Average Variable Cost and Marginal Cost can fall initially,
but eventually rise.
d) If Fixed costs were to fall, how will that affect AFC, AVC, ATC, and
MC? Explain the intuition.
e) Explain the difference between the short-run and the long-run. How
does this concept relate to the data presented here?
f) Given a price of $145, how much of Good X will the perfectly competitive firm produce? How
much profit will the firm earn?
g) In the long run, if the market for X was made up of firms with the same cost structure,
what do you roughly expect the Perfect Competition market clearing price and per-firm
quantity to be? How much profit will they earn?
h) Given the following demand schedule, how much X would a monopoly produce, given the cost
table above? What price will they charge? How much profit will the firm earn?
Monopoly Demand:
P Q
$300 0
$270 10
$240 20
$210 30
$180 40
$150 50
$120 60
$90 70
Explanation / Answer
a) The fixed cost of production includes costs that do not get changed with increase or decrease in production and sales of goods and services. The cost will be permanent and fixed. It is to be paid by a firm whether they get good or bad sales. It can also be defined as expense for operating a business for a particular firm and these costs are unavoidable. These costs are also used for determining pricing and production level.
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