Question

Complete the hypothetical table below and explain in brief, the behavior of each type of cost.

Quantity	Total Fixed Cost	Total Variable Cost	Total Cost	Average Fixed Cost	Average Variable Cost	Average Total Cost	Marginal Cost
0		0
1		25
2		40
3		50
4		60
5	100	80
6		110
7		150
8		300
9		500
10		900

Answer 1

Working notes:

(i) TC = TFC + TVC

(ii) AFC = TFC/Q

(iii) AVC = TVC/Q

(iv) ATC = TC/Q

(v) MC = Change in TC / Change in Q

Q	TFC	TVC	TC	AFC	AVC	ATC	MC
0	100	0	100
1	100	25	125	100	25	125	25
2	100	40	140	50	20	70	15
3	100	50	150	33.33	16.67	50	10
4	100	60	160	25	15	40	10
5	100	80	180	20	16	36	20
6	100	110	210	16.67	18.33	35	30
7	100	150	250	14.29	21.43	35.71	40
8	100	300	400	12.5	37.5	50	150
9	100	500	600	11.11	55.56	66.67	200
10	100	900	1000	10	90	100	400

The following cost behaviors are observed:

(a) AFC is continuously decreasing, so AFC curve is continuously downward falling.

(b) AVC initially decreases, reaches a minimum (at Q = 4) and then starts increasing. So AVC curve is U-shaped.

(c) ATC initially decreases, reaches a minimum (at Q = 6) and then starts increasing. So ATC curve is U-shaped.

(b) MC initially decreases, reaches a minimum (at Q = 3 and Q = 4) and then starts increasing. So MC curve is U-shaped. Since the minimum point of MC lies to the left of minimum points of both AVC and ATC, the MC curve intersects AVC and ATC at their minimum points.