Sunday, April 29, 2007

The relationship b/w TC, ATC and MC

Let's say that if we don't produce anything, a firm still has to pay $100 in rent. The firms total costs are the sum of its fixed costs ($100) plus its variable costs ($0) (Q0). So total costs are $100.

Now let's say the firm wants produce one unit. The cost of this unit will be $10. With 1 unit(Q), the costs will be the sum of its fixed costs ($100) plus its variable costs ($10). So the total costs are $110 (100+10).

Now let's say you are asked to find out how much "extra" this one unit costs. If you get this question, you are being asked to calculate the Marginal Cost of the unit. Thus the "extra" cost is simply the total cost at one unit (Q1) minus the total costs with 0 unit(Q0). So the marginal cost is 110-100 = 10. 10 is your marginal cost of the first unit produced.

Now lets say that I want the average total cost if you produce one unit. This is even easier because all you have to do is take the total cost and divide it by the number of units you produce. For Q1, it is simply $110/1 = $110.

Now do this same calculation for the second unit produced(Q2). The variable costs for 2 units is $15. Calculate both the total cost, marginal cost and the Average total cost at this level.

I have the answer's below (shade it to see).

Total Cost = $115. Marginal Cost = $5. Average Total Cost = $57.5

E-mail me if you still have questions.

1 comment:

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