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Unformatted text preview: e additional cost
(marginal cost) for me to travel on the plane is
probably near zero. The airline doesn’t have to
pay any more for gas, it doesn’t have to pay the
pilot any more, it doesn’t have to pay the flight
attendants any more, and so on. The only
thing it has to do is give me a ‘free coke’ if I ask
for it, and to tell you the truth I don’t mind
paying for the coke myself. Here’s $1.50.” Is
Jones right? Is the marginal cost of his traveling on the airplane close to zero for the airlines? Yes, he’s right. Still, the ticket agent isn’t
going to be too happy about the $1.50. Defining Terms
1. Define:
a. fixed costs
b. variable costs
c. marginal cost Reviewing Facts and
Concepts
2. Give an example of a
fixed cost and a variable
cost.
3. A firm produces 125 units
of a good. Its variable
costs are $400, and its
total costs are $700.
Answer the following
questions:
a. What do the firm’s
fixed costs equal?
b. What is the average
total cost equal to? EXHIBIT 75 Type of
Type of
cost
cost Five Cost Concepts Description
Description Example
Example Fixed cost
Fixed cost
(FC)
(FC) Cost, or expense, that does
expense,
not change output
not change as output
changes
changes A firm‘s monthly rent is a
firm monthly rent
fixed cost.
fixed cost. Variable cost
Variable cost
(VC)
(VC) Cost,
Cost, or expense, that
changes
changes as output changes
changes The amount a firm spends on
employees
employees’ wages is usually a
variable cost.
variable cost. Total cost
Total cost
(TC)
(TC) Fixed
Fixed costs plus variable
costs (FC VC)
costs (FC + VC) If fixed costs equal $2,000, and
If fixed costs equal $2,000, and
variable costs equal $4,000,
ariable
equal $4,000,
then total cost equals
then total cost equals $6,000. Average total
cost (ATC)
cost (ATC) Total cost divided by
otal cost divided by
quantity
quantity of output TC
Q If
If total cost equals $6,000, and
equals
quantity equals
quantity equals 1,000 units, then
average
average total cost equals $6.
$6. Marginal cost
cost
(MC)
(MC) Change in total cost divided
hange total cost divided
by change in quantity of
change
of
output
output
TC
Q If
If total cost equals $6,000 when
equals
quantity equals
quantity equals 1,000 units, and
total
total cost equals $6,008 when
equals
quantity equals 1,001 units, then
equals
then
marginal cost equals
marginal cost equals $8. What is the lesson to learn from this
example? The price you pay to travel on an
airplane is not necessarily equal to the marginal cost of traveling on the airplane. c. If variable costs were
$385 when 124 units
were produced, then
what was the total
cost equal to at 124
units? Critical Thinking
4. This section discussed
both average total cost
and marginal cost. What
is the key difference
between the two cost
concepts? Applying Economic
Concepts for $450 each. At this
price, 97 tickets are sold.
Just as the plane is about
to take off, a person without a ticket says he is willing to pay $150, but not
one penny more, to buy a
ticket on the plane. The
additional cost of the
additional passenger (...
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 Winter '14
 Economics

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