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# lec05 - Costs of Production Example Total Cost = Fixed Cost...

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1 4 Costs of Production Fixed cost = Cost of setting up operations = Costs that do not vary with output. Variable Cost = Costs that vary with output Total Cost = Fixed Cost + Variable Cost 5 Example: q FC VC TC 0 9,000 0 9,000 1 9,000 1,000 10,000 2 9,000 3,000 12,000 3 9,000 6,000 15,000 4 9,000 11,000 20,000 8 TC = total cost of producing output TC rises as the level of output rises. TC is the minimum cost of producing the output. TC includes a reasonable profit. \$ Q FC TC 9 AC = Average Cost per unit = TC / q 10 Example: q TC AC 0 9,000 - - - - - 1 10,000 10,000 2 12,000 6,000 3 15,000 5,000 4 20,000 5,000 5 27,500 5,250 6 36,000 6,000 11 AC is usually bowl-shaped. AC \$ Q

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2 12 MC = Marginal Cost = extra cost of producing one extra unit 13 Example: q TC AC MC 0 9,000 - - - - - - - - -
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lec05 - Costs of Production Example Total Cost = Fixed Cost...

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