Question

2. Determine whether each of the following is true or false:

1. In the short run, insurance on your property is a fixed cost.

2. In the short run, the heating of your warehouse is a fixed cost.

3. In the long run, there are more fixed costs than in the short run.

3. Assume that you run a concession stand at a small movie theater selling popcorn. Each day you must pay the theater management $50, so this is your fixed cost. If you are able to sell 100 boxes of popcorn each day, the variable cost per box is $0.15. Use these figures to determine average fixed cost, average variable cost, and average total cost.

4. Based on the following table, where do diminishing marginal returns begin to set in? Explain.

3. Machines	Daily Output
   1	300
   2	700
   3	1,000
   4	1,200
   5	1,300
   6	1,300

5. If fixed costs are $100 and variable costs are $200 at an output level of 30 units, what are average fixed costs, average variable costs, and average total costs?

Answer 1

1) a) True

Explanation: In the short run, the property insurance will be a fixed cost.

b) False

Explanation: In the short run, heating of your warehouse will not be the fixed cost

c) False

Explanation: In the short run, there are more fixed costs compared to long run

2) Fixed: TFC/ No of units = $50 / 100 = $0.50 per box

Variable: TVC / No of units = $15 / 100 = $0.15 per box

Total Cost: Fixed cost + Variable cost = $0.50 per box + $0.15 per box = $0.65 per box

3) At 5/6 units the diminishing marginal returns begin to set in as the total output is not longer growing

4) Average fixed costs = TFC/ No of units = 100 / 30 units = $3.33 per unit

Average variable costs = TVC / No of units = 200 / 30 units = $6.67 per unit

Average total costs = AFC + AVC = $3.33 + $6.67 = $10 per unit

5) As the output of average total cost refers to a sum of average fixed cost and average total variable cost; thus the average total cost always exceeds the average variable cost, same at the minimum point