303ex3-Notes

# 303ex3-Notes - ECON 303 Notes for Exam 3 1 Determining...

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ECON 303 Notes for Exam 3 1. Determining fixed cost, total cost, and average cost for various levels of output given a total cost curve (Ch. 5, p. 176-182) The production of a good or service requires the use of resources. Costs arise from payments for the resources used to produce the good or service. Fixed cost (FC): The cost of a fixed input. FC does not change with the quantity of output produced. Total Fixed Cost (TFC): The sum of all fixed costs. Variable cost (VC): The cost of a variable input. VC changes with the quantity of output produced. Total Variable Cost (TVC): The sum of all variable costs. Total cost (TC) = TFC + TVC. Average Fixed Cost (AFC) = TFC/Q. Average Variable Cost (AVC) = TVC/Q. Average cost (AC) or Average total cost (ATC) = TC/Q. Alternatively, AC = AFC + AVC. Marginal Cost (MC) = ∆TC/∆Q = the amount by which TC changes when Q changes by one additional unit. Note: MC = ∆TC/∆Q = (∆TFC + ∆TVC)/∆Q = ∆TFC/∆Q + ∆TVC/∆Q = 0 + ∆TVC/∆Q = ∆TVC/∆Q because TFC does not change with Q. Refer to pages 180 and 183 in the textbook and discuss the graphs. Sunk Cost: Cost incurred as a result of past decisions or irrevocable cost committed to be paid for in the future. Given TC = TFC+TVC, TC/Q = TFC/Q + TVC/Q AC = AFC + AVC Given TC = TFC + TVC, TFC = TC - TVC TVC = TC - TFC Page 1 of 13

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ECON 303 Notes for Exam 3 Given AC = AFC + AVC, AFC = AC - AVC AVC = AC - AFC Numerical examples: A. Labor Cost (w) = \$75 per day Units of Labor Per Day (L) Output Per Da y (Q) TFC TVC TC AC MC 0 0 \$300 \$0 \$300 - - 1 10 300 75 375 \$37.5 \$7.5 2 22 300 150 450 20.5 6.3 3 31 300 225 525 17.0 8.3 4 35 300 300 600 17.1 18.8 5 34 300 375 675 19.9 N/A B. Labor Cost (w) = \$75 per day Units of Labor Per Day (L) Output Per Da y (Q) TFC TVC AFC AVC AC 0 0 \$300 \$0 - - - 1 10 300 75 \$30.0 \$7.5 \$37.5 2 22 300 150 13.6 6.8 20.4 3 31 300 225 9.8 7.3 17.1 4 35 300 300 8.6 8.6 17.2 5 34 300 375 8.8 11.0 19.8 C. Suppose, Q = 700, TC = 1,600, and TVC = 1,400. What is TFC? D. Suppose, TC increases from \$50 to \$70 as Q increases from 25 to 30 units. What is the MC of the 30 th unit of output? E. Suppose, Q = 4,000, AC = \$100 and TFC = \$300,000. What is TVC? F. Suppose TC = \$200 at Q = 0. If TC = \$600 at Q = 20, what AVC at Q = 20? 2. Determining total fixed cost, total variable cost, average fixed cost, average variable cost, average cost, and marginal cost given a total cost function and the quantity of output (Ch. 5; p. 182-183) Suppose, total cost function C(Q) = 50 + 25Q - 5.5Q 2 + Q 3 . Page 2 of 13
ECON 303 Notes for Exam 3 In this case, TFC = 50 and TVC = 25Q - 5.5Q 2 + Q 3 . Derive the AFC function from TFC: AFC = TFC/Q = 50/Q. Derive the AVC function from the TVC function: AVC = TVC/Q = (25Q - 5.5Q 2 + Q 3 )/Q = 25 - 5.5Q + Q 2 Derive the AC function from the COST function: AC = C(Q)/Q = (50 + 25Q - 5.5Q 2 + Q 3 )/Q. Derive the MC function from the COST function:

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303ex3-Notes - ECON 303 Notes for Exam 3 1 Determining...

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