Question

Given the following data       Output        Total cost

output total cost

0 6

1 14

2 20

3 24

4 32

5 45

6 60

1. What is the value of total fixed cost? _______
2. What is the value of total variable cost when output= 4? _______
3. What is the value of average total cost when output equals 6?______
4. What is the marginal cost of the fifth unit?_______
5. AT what level of output is marginal cost at its minimum value? _____

Answer 1

a. Total Fixed Cost is the Total cost incurred for starting any business. Hence even if we produce zero output we will have some cost which is the Total Fixed Cost.

As from above we can see when output = 0 then Total Cost = 6. This total cost at zero output represents the Total Fixed Cost. This fixed cost stays constant for any number of output.

So, Total Fixed Cost is 6

b. As we know,

Total Cost = Total Fixed Cost + Total Variable Cost

So, At 4 units :- Total Cost = 32 and as we know Total Fixed Cost = 6

So,

32 = 6 + Total Variable Cost

Total Variable Cost = 32 - 6 = 26

Hence, Total Variable Cost when Output = 4 is 26

c) Average Total Cost = Total Cost ÷ Output.

At 6 units of output :- Total Cost = 60

​​​​​​So,

Average Total Cost = 60 ÷ 6 = 10

Hence,

Average Total Cost when output = 6 is 10.

d) We know,

Marginal Cost is the increase in Total Cost with additional unit of output.

So, Marginal Cost at n units = Total Cost at n units - Total Cost at (n-1) units

So, Marginal Cost at 5 units = Total Cost at 5 units - Total Cost at 4 units

So, Marginal Cost at 5 units = 45 - 32 = 13

Hence,

Marginal Cost of fifth units is 13

e) Let's calculate Marginal Cost (MC) as per formula mentioned earlier for each unit of output :-

MC for first unit = 14 - 6 = 8

MC for Second unit = 20 - 14 = 6

MC for third unit = 24 - 20 = 4

MC for fourth unit = 32 - 24 = 8

MC for fifth unit = 45 - 32 = 13

MC for sixth unit = 60 - 45 = 15

From above calculations we can see that MC is lowest at third unit i.e. MC = 4 at third unit.

Hence,

Marginal Cost is at its minimum value when Output is 3 units