Question

XTC Ltd has total costs of $45,000 and it is currently producing 5,000 units. It has examined its cost structure and has found that its variable costs share a linear relationship with output. Fixed costs are $10,000. The market price is $10.

(a) Determine the MC, AVC and ATC functions (write down the equation) for the firm.

(b) Determine the current profit of the company.

Answer 1

(a) Total cost (TC) = Fixed cost (FC) + AVC x Q

$45,000 = $10,000 x AVC x 5,000

5,000 x AVC = $35,000

AVC = $35,000 / 5,000

AVC = $7

Therefore,

TC ($) = 10,000 + 7Q

MC = dTC/dQ = 7

AVC = $7

ATC = TC/Q = (10,000 / Q) + 7

(b) With given values,

Total revenue (TR) = Price x Q = $10 x 5,000 = $50,000

Profit = TR - TC = $(50,000 - 45,000) = $5,000