The chief economist for Argus Corporation, a large appliance manufacturer, estim

Question

The chief economist for Argus Corporation, a large appliance manufacturer, estimated the firm%u2019s short-run cost function for vacuum cleaners using an average variable cost function of the form

AVC = a + bQ + cQ2

where AVC dollars per vacuum cleaner and Q number of vacuum cleaners produced each month. Total fixed cost each month is $180,000. The following results were obtained:

DEPENDENT VARIABLE:
AVC R-SQUARE 0.7360 F-RATIO 39.428 P-VALUE ON F 0.0001
OBSERVATIONS:19 0

PARAMETER STANDARD
VARIABLE Estimate error
INTERCEPT 191.93 54.65
-0.0305 0.00789
0.0000024 0.00000098

T-RATIO P-VALUE
3.512 0.0029
23.866 0.0014
2.449 0.0262

a. Are the parameter estimates statistically significant at the 2 percent level of significance?
b. Do the results indicate that the average variable cost curve is U-shaped? How do you know?
c. If Argus Corporation produces 8,000 vacuum cleaners per month, what is the estimated average variable cost? Marginal cost? Total variable cost? Total cost?
d. Answer part c, assuming that Argus produces 10,000 vacuum cleaners monthly.
e. At what level of output will average variable cost be at a minimum? What is minimum average variable cost?

Explanation / Answer

answer#a

only a and b are significant at the 2% level.

c is significant at 2.62% level

#b AVC is U shaped because a is greater then b,

b is less than zero and c is greater than zero

#c.         AVC8,000 = $101.53; MC8,000 = $164.73; TVC8,000 = $812,240; TC8,000 = $992,240

d.         AVC10,000 = $126.93; MC10,000 = $301.93; TVC10,000 = $1,269,300; TC10,000 = $1,449,300

e.         Qmin = 6,354; AVCmin = $95.03

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