Question

2. Think of a business with which you are somewhat familiar. For that business:

A. What are the fixed costs?

B. What are the variable costs?

C. What are the explicit costs?

D. What are the implicit costs?

The following numbers will be estimates (I'm not asking you to do any research; Begin by entering possible numbers for the fixed costs and variable costs for each level of output. Then calculate total cost, marginal cost and average cost. I just want you to have practice calculating the various costs.)

Complete this table

Quantity	Fixed cost $	Variable cost $	Total cost $	Marginal cost	Average total cost
0
1
2
3
4

E. Do your average total costs show economies of scale or diseconomies scale? Why?

Answer 1

Suppose we analyze a small grocery shop:

A. Fixed costs: Insurance of shop, Property taxes, Fixed components of utility costs, Rent of warehouse

B. Variable costs: Raw materials, Shipping, Packaging, Daily wages of workers, Variable utility costs

C. Explicit costs: Insurance, taxes, utility bills, rents, shipping, raw materials, salaries

D. Implicit costs: The owner's time and labor which he could have devoted elsewhere, the office space which could have been rented out

Table:

Quantity	Fixed Cost $	Variable Cost $	Total Cost $	Marginal Cost $	Average Total Cost $
0	10	0	10	--	--
1	10	5	15	5	15
2	10	10	20	5	10
3	10	15	25	5	8.33
4	10	20	30	5	7.50

Here, fixed cost is taken as $10 throughout.

The variable cost is $5 per unit.

Total cost = FC + VC

Marginal cost =

Average Total cost =

E. The Average Total cost shows economies of scale. As the quantity produced increases, the ATC falls.

This is because, with higher production, there is an increase in the efficiency of the factors of production, such as labor and capital.