Answer to Question #302353 in Microeconomics for Muna

Question

Below is the hypothetical data on the costs of production in a perfectly competitive firm.

Output Average variable cost

1 500

2 460

3 400

4 420

5 420

6 450

7 490

8 537.5

If the cost of the firm before operation is 600;

a)     Calculate the Total Cost, Marginal Cost, Average Cost, Average Fixed Cost.

b)     Explain why Marginal Cost of the firm rises after the 4^th output.

c)     At what output level is cost efficient for the firm and why?

d)     With the aid of a diagram, explain the profit maximizing condition for a firm.

Answer 1

a) Total cost= Fixed cost + total variable cost.

Total variable cost will be: Units times average variable cost.

$(1\times500)+(2\times460)+(3\times400)+(4\times420)+(5\times420)+(6\times450)+(7\times490)+(8\times537.5)=16,830$

Total cost=600+16,830=17,430

Marginal cost=average variable cost=467.5

$Average cost=\frac{total}{units}=\frac{17,340}{36}=481.67$

$Average fixed cost=\frac{Total fixedcost}{units}=\frac{600}{36}=16.67$

b) Marginal cost increases because they start at diminishing rate and eventually they rise.

c) At 4.5 units where the curve is at optimal.

d) Profit is maximized where MC=MR