Question

Suppose that a given firm has the following total cost and marginal cost functions: C(q) = 50+5q+ 5q 2 , MC(q) = 5+10q. 2

(a) Write down expressions for the fixed cost, average fixed cost, average total cost and average variable cost associated with this production function. In addition, identify the quantity at which average total cost is minimized.

(b) Consider the restaurant industry. Provide an example of a fixed cost, variable cost, and sunk cost. Be sure to justify you answers.

Answer 1

b.

In case of restaurant industry the fixed cost will be Rent of the Place, chair, table kitchen items and Gas etc.

Fixed cost is that which does not vary with the change in the output level.

Variable cost is those costs which vary with the production level.

Variable cost will be salary of staff, raw items of food and water and electricity bill.

The sunk cost can be defined those costs which cannot be recovered when production is stooped.

Sunk cost will be chair, table kitchen items and Gas etc.