Question

1. A manufacturer of base units for home sensor protection (security, water, carbon monoxide, etc.) produces these units in a small facility in northern Indiana. The firm’s engineer has set up “assembly cells” in the facility that she believes will be the most efficient means of producing the units. The following table displays the various costs per hour for producing the units.

Outputs per hour Total Cost Fixed Cost Variable Cost Avg Total Cost Avg Fixed Cost Avg Var Cost Marg Cost

0 $100 $100 $30

1 $130 $100 $30 $130    $100 30 $28

2 $158 $100 $58 $79 $50 $29 $25

3 $183 $100 $83 $61 $33.33 $27.67 $21

4 $204 $100 $104 $51 $25 $26.00 $18

5 $222 $100 $122 $44.40 $20 $24.40 $20

6 $242 $100 $142 $40.33 $16.67 $23.67 $23

7 $265 $100 $165 $37.86 $14.29 $23.57 $30

8 $295 $100 $195 $36.88 $12.50 $24.38 $38

9 $333 $100 $233 $37 $11.11 $25.89 $40

10 $373 $100 $273 $37.30 $10.00 $27.30

1. Explain why Average Total Costs (ATC) declines through the production quantities. Only with the tenth unit per hour does the firm see a minor increase in ATC.
2. Explain why Average Fixed Cost (AFC) declines across all levels of production. What do you call this phenomenon?
3. Explain why Marginal Costs initially decline but then increase with the sixth unit of production. Which short run production principle is at work here in creating this pattern of Marginal Costs?

Answer 1

Ans. =

A)

As we start Utilizing the Resources, Initially there is a production on the Level which is Lesser than Total Capacity. which means the Per Unit Cost of Output would be Less, and Average Total Cost measures only the Per Unit Cost of Output.

and as we move towards employing more and more capacity, Per Unit Cost Of Rises as if we produce above the Optimum Level of Resources, Costs will Definitely Rise and that's what we see from the 9th to 10th level of Output. ATC starts Rising.

B)

Fixed Costs are those which must be Incurred to the Busniess in a Fixed Amount (No matter how much the Quantity Of Output is, Fixed Cost will remain the same even if we produce 1 Level of Output)

Hence, Average Fixed Cost is the Per Unit Fixed Cost of Output. So, If the Total Fixed Cost is not going to Increase or Decrease and we are producing more and more then Obviously Per unit Fixed Cost per Output would Definitely Decrease.

Average Fixed Cost never becomes Zero (Means it doesn't touch X-axis or Y-axis) Ut will get less and less but never be Zero. That's why its called as Rectangular Hyper-bola.

C)

Marginal Cost is the Additional Cost. which is Incurred with one more unit of Rise in Output.

Initially as the firm starts employing resources both fixed and variable, Marginal Cost would Decrease because Initially we are employing more and more resources and we are utilizing the Capacity available for Production, that would Definitely Decrease the Overall Costs and Marginal Cost too.

But as we move towards producing more and more Output We reach a Point of Optimum Utilization after that point there would be more costs incurred with every Increase in the Output due to Diseconomies of Scale.

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