The only thing it has to do is give me a free coke if

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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 7-5 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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