Exercise: Cost Theory

Answer ALL Questions:

1. XYZ manufacturing is operating in a local market. It has a fixed cost of 5000. Its average
variable cost function ( AVC ) has been approximated by :

AVC = 1000 + 3Q

a) Derive the firm's total cost function

(2 marks)

b) Determine the equation for each of the following;

i. Average fixed cost ( AFC )

ii. Average Cost ( AC )
iii. Total variable cost ( TVC )
iv. Marginal cost ( MC )
(4 marks)
c) Calculate the rate of output that will minimize average cost.
(4 marks)
d) How much is the average cost at this level of output?
(2 marks)

2. Suppose that the manager of a firm operating in a perfectly competitive market has
estimated firm’s average variable cost function to be

AVC = 10 – 3Q + 0.5Q2

Where Q is output. Suppose that total fixed cost (TFC) is RM600.

a) What is the corresponding marginal cost (MC) function?

(2 marks)
b) At what output AVC at its minimum?
(4 marks)
c) What is the minimum value for AVC?
(2 marks)