TUTORIAL 5

PRODUCTION AND COSTS

Question 1
Consider a total cost function of a firm, T C = 190 + 5Q − 2Q 2 + 1 3 Q 3 . Derive the equations
for the firm’s, (a) Total variable cost TVC. (b) Total fixed cost TFC. (c) Average total cost (ATC ).
(d) Average variable cost (AVC ). (e) Average fixed cost (AFC ). (f) Marginal cost (MC ).

Question 2 Why is MC the same when computed from either TVC or from TC ?
Solution to Question 2: MC measures the change in total cost as output changes by
one unit. Since TC is the sum of TFC and TVC, the change in TC must be equal to the
change in TVC (TFC remaining fixed by definition).

Question 3 Explain why the MC curve cuts AVC and ATC curves at their minimum points
Question 4
Bill owns and runs a kebab shop. The following data are about his financial matters in his first
year of business. 190,000 Total revenue 65,000 Salary that Bill could have earned if he had
worked for another firm 90,000 Loan from a bank 9,000 Interest paid to the bank 70,000
Purchase of durable assets with his own money 4,200 Dividend that he could have earned by
investing his $70,000 in shares 14,000 Depreciation of the durable assets 30,000 Salary for an
assistant 67,000 Raw materials purchased and used Using only the relevant figures, calculate
Bill’s accounting profit and economic profit for his first year of business.
Question 5
Explain the difference between explicit and implicit costs, giving examples.
Question 6
The equation below shows the short-run total product of a firm as a function of the quantity
of labour employed.
Q = 6L1/2
(a) Calculate the marginal product (MP L) and the average product of labour (APL).
(b) Sketch the short-run total production function. (Hint: Try calculating Q for a range of
values of L to get a sense of the shape.)
(c) Is the marginal product calculated in part (a) consistent with the law of diminishing
returns? Explain.