Theory question 102
Theory of Costs and RevenueSection A (data response: answer one question only from this section)
The table below represents the output level of a particular firm producing soft drinks. Use the information in the table to answer the questions that follow.
OUTPUT [Units]: 0, 12, 23, 36, 48, 58
Given the cost equation of the firm in Naira as C = 20 + 2q where C is total cost and q is quantity produced calculate: (a) the total cost of producing: (i) 12 units of output (ii) 36 units of output (b) the average cost when: (i) 48 units were produced (ii) 58 units were produced (c) the marginal cost when: (i) 23 units were produced (ii) 36 units were produced (d) If the firm is operating in a perfectly competitive market and the market price is N5 per unit, determine the profit when: (i) 23 units are produced (ii) 48 units are produced
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(a)(i) C = 20 + 2(12) = N44. (ii) C = 20 + 2(36) = N92.
(b)(i) TC = 20 + 96 = N116; AC = 116 ÷ 48 ≈ N2.42. (ii) TC = 20 + 116 = N136; AC = 136 ÷ 58 ≈ N2.34.
(c) Each extra unit adds N2 to total cost, so MC = N2 at any output. (i) From 12 to 23 units: (66 − 44) ÷ 11 = N2. (ii) From 23 to 36 units: (92 − 66) ÷ 13 = N2.
(d)(i) TR = 5 × 23 = N115; TC = 20 + 46 = N66; profit = N49. (ii) TR = 5 × 48 = N240; TC = N116; profit = N124.
Total cost = fixed part (20) + 2 × output; profit = TR − TC.