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Cost Function Analysis and Solutions

The document discusses various cost functions for firms, detailing fixed costs, total variable costs, average variable costs, and marginal costs. It includes numerical examples to illustrate calculations for different output levels and cost structures. Additionally, it provides a table summarizing fixed, variable, and total costs at specified output levels, along with average and marginal costs.

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215 views8 pages

Cost Function Analysis and Solutions

The document discusses various cost functions for firms, detailing fixed costs, total variable costs, average variable costs, and marginal costs. It includes numerical examples to illustrate calculations for different output levels and cost structures. Additionally, it provides a table summarizing fixed, variable, and total costs at specified output levels, along with average and marginal costs.

Uploaded by

m.ziyanpatel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Theory of Cost

Numericals
Suppose a firm faces a cost function of C=8+4Q+Q2.

What is the firm’s Fixed Cost?


Fixed Cost=8. The part of the cost that doesn’t change with output.

What is the firm’s Total variable Cost, Average variable cost, and
Marginal cost?
TVC=4Q+Q2
AVC=TVC/Q=4+Q
MC=dTC/dQ=4+2Q
AFC=8/Q
Strictly for lecture purpose at NMIMS SOC
The short run cost function of a firm is given by the equation TC = 200+55Q
where TC is the total cost and q is the output level.
• What is the company’s fixed cost? 200
• If the company produced 100,000 units of goods, what would be its AVC.
TVC=55Q. AVC=TVC/Q=55Q/Q=55. AVC will be 55 at 100,000
• What is its marginal cost of production?
• MC=dTC/dQ=55. MC will be 55 at 100,000
• What is the average fixed cost at 100,000 units of goods.
TFC=200. AFC=200/Q. At 100,000 AFC=200/100,000=2/1000=.002
The short run total cost function is given by TC=100+50Q-12Q2+Q3

(i) Determine: total fixed cost, total variable cost, average variable cost, marginal cost.
TFC=100. TVC=50Q-12Q2+Q3 AVC=(50Q-12Q2+Q3)/Q=50-12Q+Q2
MC=dTC/dQ=50-24Q+3Q2
(i) Calculate the total cost, AC, AVC, MC when the firm produces 10 units of output
AC=TC/Q=(100+50Q-12Q2+Q3)/Q. AT Q=10, AC=[(100+50(10)-12(10)2+(10)3)/10]=40
AVC=50-12Q+Q2 =50-12(10)+100=150-120=30. MC=50-24Q+3Q2=50-24(10) +3(10)2
=350-240=110
(i) Calculate the level of output at which AVC is minimum.
AVC is minimum when MC=AVC
→50-24Q+3Q2=50-12Q+Q2
3Q2-Q2=12Q
Q=6

Strictly for lecture purpose at NMIMS SOC


Alternative approach
AVC=50-12Q+Q2
Calculate the level of output at which AVC is minimum
For minimum, first order condition is
dAVC/dQ=0
-12+2Q=0
Q=6
A firm has a fixed production cost of Rs. 5000 and a constant marginal
cost of production Rs. 500 per unit produced.

• What is the firms total cost function?


TC=TFC+TVC. TFC=5000. MC=500. Therefore TVC=500Q
TC=5000+500Q.

Strictly for lecture purpose at NMIMS SOC


TC=5000+500Q
Q TFC TVC TC MC AC AVC AFC
1 5000 500 5500 500
2 5000 1000 500
3 5000 1500 500
4 5000 2000 500
5 5000 2500 500
6 5000 3000 500
A firm’s fixed costs for zero units of output and its average total cost of producing different output levels are
summarized in the table below. Complete the table to find the fixed cost, variable cost, total cost, average fixed
cost, average variable cost, and marginal costs at relevant levels of output.

Q Fixed Variable Total Aver Average Average Marginal Cost


Cost Cost Cost age Variable Total
Fixed Cost Cost TC=AC*Q
Cost TVC=TC-TFC
AVC=TVC/Q
0 15000 0 15000 --- --- - ----
AFC=TFC/Q
100 15000 15000 30000 150 150 300 15000/100=150 MC=(TC2-TC1)/(Q2-Q1)
200 15000 25000 40000 75 125 200 10000/100=100
300 15000 37500 52500 50 125 175 12500/100=125
400 15000 75000 90000 37.5 187.5 225 37500/100=375
500 15000 147500 162500 30 295 325 72500/100=725
600 15000 225000 240000 25 375 400 77500/100=775

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