Question

Please provide accurate answers to the followings with appropriate graphs:

Please write your responses clearly and elaborate your answers with graphs and equations to get full credit.

PART A

Q.1 The following table gives the short-run and long-run total costs for various levels of output of Consolidated National Acme, Inc.

Q 0 1 2 3 4 5 6 7

TC 1 0 300 400 465 495 540 600 700

TC 2 350 400 435 465 505 560 635 735

1. Which column, TC 1 or TC2, gives long-run total cost, and which gives the short-run total cost? How do you know? Explain.
2. Use the column which you identify in question 1 a) as the short-run total cost column to find the short-run total fixed cost, total variable cost, average fixed cost, average variable cost, and Marginal cost for each level of output in the table below.

Q 0 1 2 3 4 5 6 7

TFC

TVC

AFC

AVC

MC

3. Plot the data in question 1 b) and draw the curves for TFC, TVC, AFC, AVC, and MC. All the curves should be clearly drawn and labeled properly to get full credit.
4. Why the average cost and marginal cost are curves U Shaped? Discuss the relationship between the average and marginal cost.

Answer 1

a) Long run total cost curve starts from 0 as there is no fixed cost while short run total cost curve starts from some positive number as if there is no production there would be some level of fixed cost attached with it due to which short run total cost curve starts some what up from the origin. Thus TC1 is long run and TC2 is short run total cost curve.

b)

Output	TC	TFC	TVC	AFC	AVC	MC
0	350	350	0	-	-	-
1	400	350	50	350	50	50
2	435	350	85	175	42.5	35
3	465	350	115	117	38.33	30
4	505	350	155	87.5	38.75	40
5	560	350	210	70	42	55
6	635	350	285	58.3	47.5	75
7	735	350	385	50	55	100

c)

d) AVC and MC is always U shaped as initially these cost are high because of initial stage of production. Once labor get to know the work, the cost falls and when the depreciation of firm rises, these cost curve start rising. When AVC falls, MC < AVC, when AVC rises then MC > AVC and MC cuts AVC at its lowest point.