Chapter 7-Cost Analysis

Practice
 Problem 1

 A firm has determined that its variable costs are given by the
following relationship:
 
TVC = 0.05Q3 - 5Q2 + 500Q
 
where Q is the quantity of output produced.
 (a)Determine the output level where average variable costs are
minimized.
(b)Determine the output level where marginal costs are
minimized.
AVC is at its minimum when AVC = MC
MC is the derivative of TVC

a-MC = 0.15Q2 – 10 Q + 500

AVC = 0.05Q2 – 5Q + 500
MC = AVC
Q ( -- 0.1 Q + 5) = 0
0.1Q = 5
Q = 50 is the output level where AVC is at its minimum

b-MC is at its minimum when the derivative of MC = 0

Derivative of MC = 0.30Q – 10 = 0
Q = 33.3 is the output level where MC is at its minimum
 Problem 2
Given the following cost function:
 
TC = 40 + 50 Q + 5 Q2
 
a-Calculate: TVC-TFC-ATC-AVC-AFC-MC?
b-Calculate the level of Q where ATC starts
increasing?
c-Illustrate ATC-AVC-MC on one graph if Q = 10?
a-TC = 40 + 50 Q + 5 Q2
TVC = 50 Q + 5 Q2
TFC = 40

ATC = 40/Q + 50 + 5Q

AVC = 50 + 5Q

AFC = 40/Q

MC = 50 + 10Q
b- ATC starts to increase after it reaches its minimum
MC = minimum of ATC
50 + 10Q = 40/Q + 50 + 5Q
50 + 10Q = 5Q2 +40 + 50Q / Q
10Q2 + 50Q = 40 + 50Q + 5Q2
40 = 5Q2

Q = 2.83

is the level of production when ATC is at its minimum

 Problem 3
A firm's total cost function is given by the equation:
 
TC = 4000 + 5Q + 10Q2
 
A-Write an expression for each of the following cost concepts:
 
Total Fixed Cost = 4000
Average Fixed Cost = 4000/Q
Total Variable Cost = 5Q + 10Q2
Average Variable Cost = 5 + 10Q
Average Total Cost = 4000/Q + 5 + 10Q
Marginal Cost = 5 + 20Q
a
B- Calculate Q at minimum ATC?
5 + 20Q = 4000/Q + 5 + 10Q
5 + 20Q – 4000/Q – 5 – 10Q = 0
10Q = 4000/Q
4000 = 10Q2
Q2 = 400
Q = 20
 Problem 4
Given the total cost function
TC = 100 + 40Q - 15Q2 + 5Q3, calculate the
a. average fixed cost function (AFC)
b.average variable cost function (AVC)
c. marginal cost function (MC)
Answer:
a. AFC = 100/Q
b.AVC = 40 - 15Q + 5Q2
c. MC = 40 - 30Q + 15Q2
 Problem 5
If TFC = 2,500,000
TVC = 1,000,000
AVC = 10
Calculate ATC ?
AVC = TVC /Q so 10 = 1,000,000/Q
Q=100,000
AFC = TFC/Q = 2,500,000/100,000 = 25
ATC = AFC + AVC = 25 + 10 = 35
 Problem 6: Fill the Table
Q TC MC TFC TVC ATC AVC AFC
0 150 -- 150 0 -- --- ---
1 350 200 150 200 350 200 150
2 470 120 150 320 235 160 75
3 550 80 150 400 183.3 133.3 50
4 650 100 150 500 162.5 125 37.5
5 790 140 150 640 158 128 30
6 1010 220 150 860 168.3 143.3 25
7 1330 320 150 1180 190 168.5 21.4
8 1790 460 150 1640 223.7 205 18.7
9 2410 620 150 2260 267.7 251.1 16.6
 Problem 7 Fill the Table
Q TC TFC TVC ATC AFC AVC MC

0 120

1 265

2 264

3 161

4 85

5 525

6 120

7 97

8 768

9 97

10 127
 Problem 8: T/F
 
Indicate whether each of the following statements is true or false:

1-AFC graph is negatively sloped (T)

2-Fixed costs are zero when the firm decides to produce no output.(F)
3-AFC follows the shape of ATC.(F)
4-When ATC is less than MC average cost is rising (T)
5-The MC schedule is obtained by subtracting successive values of TC or TVC
(T)
6-MC equals the change in total cost associated with selling an additional unit
of output (F)
7-AVC is a decreasing figure (F)
8-MC = AVC at the minimum of MC (F)
9-The marginal cost function is the derivative of the total cost function with
respect to output (T)