Theory question 102
Theory of Costs and RevenueSection A (answer one question only from this section)
Complete the following cost schedules and answer the questions that follow:
Output | Total cost TC | Average cost AC | Marginal cost MC
1 | 8 | 8 | –
2 | 14 | ? | ?
3 | ? | 6 | ?
4 | 20 | ? | ?
5 | ? | 6 | ?
6 | 48 | ? | ?
(a) At what output is AC at the minimum? (b) At which output is MC at the minimum (c) At what output does AC start increasing? (d) At what output does MC start to be greater than AC? (e) What is the maximum output?
Show the model answer
Completed schedule (TC = AC × output; AC = TC ÷ output; MC = change in TC):
Output 1: TC 8, AC 8, MC –
Output 2: TC 14, AC 7, MC 6
Output 3: TC 18, AC 6, MC 4
Output 4: TC 20, AC 5, MC 2
Output 5: TC 30, AC 6, MC 10
Output 6: TC 48, AC 8, MC 18
(a) AC is lowest (5) at 4 units.
(b) MC is lowest (2) at 4 units.
(c) AC starts rising at 5 units.
(d) MC (10) first exceeds AC (6) at 5 units.
(e) The largest output in the schedule is 6 units (the least-cost or optimum output is 4 units).
Fill in TC first for outputs 3 and 5 using TC = AC × Q.