Question

 

1. What is average total cost (ATC)? Why is that important to a firm?
2. If you were manager of In and Out Burger, how would you calculate the marginal cost of producing one more burger?
3. If you were a manager of In and Out Burger, how would you calculate the cost per burger produced? (of the average total cost per burger)?
4. Why in the short run, does marginal cost rise as more units are produced?
5. What is the long run production decision?
6. What are economies of scale? (Does it pay to get bigger in size?)
7. What are diseconomies of scale?

Answer 1

ANS a) The total cost divided by the amount of goods produced (output

quantity, Q) is equal to the average cost or unit cost.

The number of the average variable costs (total variable costs divided by Q)

plus the average fixed costs (total fixed costs divided by Q) is also comparable.

Measured at the level of production, average costs or costs per unit are useful things to know in

and of themselves, but they also have some important properties that economists use to find out about production efficiency.

You divide total costs (TC) by the quantity

produced (Q) to determine the overall total cost (ATC):

ATC=TC/Q

Now, here's something fun. Complete expenses are broken down into constant (FC) and contingent (VC) charges.

Therefore, by splitting each of these elements, you can Divide of of these components by the amount of output produced for the purpose of achieving average fixed costs (AFC) and average variable costs (AVC), respectively the amount of fixed cost per unit and the amount of variable cost per unit. Or to put in a different way:

ATC = TC / Q = (FC + VC) / Q = AFC + AVC

hence total cost maynot be able to tell abouty the individual cost or correct cost incurred by firm oncureed by firm in the production of any product.

ansb) if i were the manager of in and out company then i would find out quantities of burgers produced first then i would find total cost incurred on it that give me total average cost as given in the table below

In and Out burger MARGINAL COST,TOTAL COST TABLE-1

quantity of burgers(per day)	TC	FC	VC	ATC	AFC	AVC	MC
100	540	40	500	5.40	0.40	5.00
							4
150	740	40	700	4.93	0.27	4.67

MC=CHANGE IN TOTAL COST/TOTAL COST

(740-540/NEW Q-100)=4

ON SOLVING FORTHE NEW Q ANS WILL COME 150

HENCE IN THIS WAY CAN FIND MARGINAL COST OF IN AND OUT BURGER IF WE ARE MANAGER

ANS D)marginal cost rises initiallly in the graph of short run because it depends on variable cost not fixed cost and on producing every extra commodity its utility to a consumer increases but after a certain limit it starts decreasing because of its diminishing marginal utility nature

ans e)

Scale economies are cost advantages gained by firms as production becomes productive. By raising demand and lowering costs, businesses may reach economies of scale. This exists when prices are allocated over a greater variety of items. Costs may be both variableand  fixed. When it comes to economies of scale, the size of the company usually matters. The bigger the business, the more cost savings there would be.

When it gets too big and chases an economy of scale, a business may build a diseconomy of scale.

and yes it pays to get a big size of any firm and in order to be first in competition you have to incure cost on the initially stage of firm

ans e)

Diseconomies of size in a big organisation may be caused by:

Control-it is imperfect and costly to track the efficiency and production level of thousands of workers in massive, diverse corporations-this relates to the notion of the principal-agent problem, i.e. the complexities of shareholders controlling managers 'performance.

Co-ordination-complex manufacturing procedures can be difficult to manage through several plants in various places and countries. It is costly to achieve effective knowledge transfers in major companies, as is the expense of handling procurement arrangements for hundreds of vendors at multiple points in the supply chain of an enterprise.

Co-operation-staff may create a sense of discontent and lack of morale in big companies. If they do not consider themselves an integral part of the business, their efficiency may decrease , resulting in factor input wastage and higher costs.