Question

1. Use the data in the table and calculate the average costs and marginal cost.     

Output (units)	Total cost($)	AFC	AVC	ATC	MC
0	40
10	54
20	62
30	80
40	84

2. Discuss the nature of the Average total cost curve. Is it increasing or decreasing? Explain with reason.                                                                                                                         
3. What is the relation between Average total cost and marginal cost? Draw the typical shape of Average total cost (ATC) and Marginal cost (MC). When will the firm achieve maximum efficiency?                                                                                                         

Answer 1

ATC = TC / Q

MC = Change in TC / Change in Q

Q	TC	ATC	MC
0	40	-	-
10	54	5.4	14/10 = 1.4
20	62	3.1	8/10 = 0.8
30	80	2.67	18/10 = 1.8
40	84	2.1	4/10 = 0.4

b. As the quantity of output is increased, the average total cost is declining. This may be because of Economies of Scale. An additional unit of output produced decreases the cost substantially.

c. As it can be seen in the table, at the initial levels of output, AC decreases and MC also declines but MC is lower than AC. So, When AC falls, MC is always < AC.

At higher levels of output i.e Q > 40, AC will increase and MC becomes > MC.

When AC remains unchanged, then AC = MC.

Typical relation between AC and MC is shown below:

Point A is also known as Minimum Efficient Scale, MES.

To the left of A, MC < AC

To the right of A, MC > AC