Question

1. A Taco Bell store finds that the marginal cost of a taco is less than the average total cost of producing tacos. Can you determine whether the average total cost of making tacos will rise, fall, or not change if another taco is produced? Explain your answer.
2. Suppose that a firm’s total costs are as shown in the table below.

Output (units per year)	Total cost (dollars)
0	20,000
1	20,100
2	20,300
3	20,700
4	21,200
5	21,800

1. What are the firm’s total fixed costs?
2. What are the firm’s variable costs when it produces 4 units a year?
3. What is the firm’s marginal cost between 1 and 2 units of output? Between 2 and 3? Between 3 and 4? Between 4 and 5?
4. What is the firm’s average total cost when it produces 1 unit per year? When it produces 2? When it produces 3?

4. Fill in the blanks in the table below.

Output (units per hour)	Total fixed cost (dollars)	Total variable cost (dollars)	Average total cost (dollars)	Average fixed cost (dollars)	Average variable cost (dollars)
0	500	____	____	____	____
1	____	20	____	____	____
2	____	____	300	____	____
3	____	____	____	____	133.33
4	____	1,100	____	____	____

Answer 1

1.Ans:

The average total cost of making tacos will fall, if another taco is produced. Because , when marginal cost is less than the average total cost , then average total cost will fall in the subsequent level of production  . On the other hand, when marginal cost is greater than the average total cost , then average total cost will rise in the subsequent level of production.

2.Ans:

a) Ans: The firm’s total fixed costs are $20,000.

Explanation:

Fixed cost are available even at zero level of output and remain constant throughout the subsequent level of production.

b ) Ans: The firm’s variable costs are $1,200 when it produces 4 units a year.

Explanation:

Total cost = Fixed cost + Variable cost

$21,200 = $20,000 + Variable cost

Variable cost = $21,200 - $20,000 =$1,200

c) Ans:

Output (units per year)	Total Cost ( dollars)	Marginal Cost ( dollars)
0	20000	--
1	20100	100
2	20300	200
3	20700	400
4	21200	500
5	21800	600

Explanation:

Marginal cost = Change in total cost / Change in quantity

d) Ans:

Output (units per hour)	Total fixed cost (dollars)	Total variable cost (dollars)	Average total cost ( dollars)	Average fixed cost ( dollars)	Average variable cost ( dollars)
0	500	0	--	--	--
1	500	20	520	500	20
2	500	100	300	250	50
3	500	400	300	166.67	133.33
4	500	1100	400	125	275

Explanation:

Average Total cost = Total cost / Quantity

Average Fixed cost = Total fixed cost / Quantity

Average Variable cost = Total Variable cost / Quantity