No. of Products Total Variable Costs, $ Total Costs $ Average Fixed Cost $ Average Variable...

No. of Products	Total Variable Costs, $	Total Costs $	Average Fixed Cost $	Average Variable Cost $	Average Total Cost $	Marginal Cost$
0	0
1	12
2	20
3	24
4	27
5	40
6	65
7	98

Assume that the fixed cost is $80, calculate the above costs in the table and explain the difference between average total costs and marginal costs.
In a graph illustrate the Average Total Cost and Marginal Cost Curves, explain their relationship.
Assume marginal revenue is $ 25 (constant at any quantity). Determine the profit maximizing output and calculate the profit.
Examine why a firm could decide to produce at a loss on a short run.

Solutions

Expert Solution

Difference Between ATC and MC :

Average total costs measures the average costs of producing some quantity of output.

Marginal Cost is the additional cost of producing one more unit of output. So it is not the cost per unit of all units being produced, but only the next one (or next few). Marginal cost can be calculated by taking the change in total cost and dividing it by the change in quantity.

Relationship between ATC and MC :

When ATC falls with increase in output, MC is lower than ATC, i.e., MC curve lies below the ATC curve. However, it is not necessary that MC should fall throughout this stage. MC rises earlier than ATC.
When ATC rises with increase in output, MC is higher than ATC, i.e., MC curve lies above the AC curve.
MC intersects ATC at its minimum point. Both are U-shaped curves on account of the operation of the law of variable proportions.

When MR = $25 the profit maximizing output is 6 because profit is maximized when MR = MC = 25. Marginal Cost of $25 is achived at output of 6

A firm might operate at loss on a short run because If the firm can cover their variable costs in the short run, then they can start to pay down some of their fixed costs by producing. If they shut down they must pay all of their fixed costs. If the firm can cover the variable costs they can use any excess revenue towards paying their fixed costs, which is a better outcome than shutting down in the short run.

Rahul Sunny answered 1 year ago

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