A manufacturer of base units for home sensor protection (security, water, carbon
ID: 1118366 • Letter: A
Question
A manufacturer of base units for home sensor protection (security, water, carbon monoxide, etc.) produces these units in a small facility in northern Indiana. The firm’s engineer has set up “assembly cells” in the facility that she believes will be the most efficient means of producing the units. The following table displays the various costs per hour for producing the units.
Output Per Hour
Total Cost
Fixed Cost
Variable Cost
Avg. Total Cost
Avg. Fixed Cost
Avg. Variable Cost
Marginal Cost
0
$ 100.00
$ 100.00
$ 30.00
1
$ 130.00
$ 100.00
$ 30.00
$ 130.00
$ 100.00
$ 30.00
$ 28.00
2
$ 158.00
$ 100.00
$ 58.00
$ 79.00
$ 50.00
$ 29.00
$ 25.00
3
$ 183.00
$ 100.00
$ 83.00
$ 61.00
$ 33.33
$ 27.67
$ 21.00
4
$ 204.00
$ 100.00
$ 104.00
$ 51.00
$ 25.00
$ 26.00
$ 18.00
5
$ 222.00
$ 100.00
$ 122.00
$ 44.40
$ 20.00
$ 24.40
$ 20.00
6
$ 242.00
$ 100.00
$ 142.00
$ 40.33
$ 16.67
$ 23.67
$ 23.00
7
$ 265.00
$ 100.00
$ 165.00
$ 37.86
$ 14.29
$ 23.57
$ 30.00
8
$ 295.00
$ 100.00
$ 195.00
$ 36.88
$ 12.50
$ 24.38
$ 38.00
9
$ 333.00
$ 100.00
$ 233.00
$ 37.00
$ 11.11
$ 25.89
$ 40.00
10
$ 373.00
$ 100.00
$ 273.00
$ 37.30
$ 10.00
$ 27.30
a. Explain why Average Total Costs (ATC) declines through the production quantities. Only with the tenth unit per hour does the firm see a minor increase in ATC.
b. Explain why Average Fixed Cost (AFC) declines across all levels of production. What do you call this phenomenon?
c. Explain why Marginal Costs initially decline but then increase with the sixth unit of production. Which short run production principle is at work here in creating this pattern of Marginal Costs?
Output Per Hour
Total Cost
Fixed Cost
Variable Cost
Avg. Total Cost
Avg. Fixed Cost
Avg. Variable Cost
Marginal Cost
0
$ 100.00
$ 100.00
$ 30.00
1
$ 130.00
$ 100.00
$ 30.00
$ 130.00
$ 100.00
$ 30.00
$ 28.00
2
$ 158.00
$ 100.00
$ 58.00
$ 79.00
$ 50.00
$ 29.00
$ 25.00
3
$ 183.00
$ 100.00
$ 83.00
$ 61.00
$ 33.33
$ 27.67
$ 21.00
4
$ 204.00
$ 100.00
$ 104.00
$ 51.00
$ 25.00
$ 26.00
$ 18.00
5
$ 222.00
$ 100.00
$ 122.00
$ 44.40
$ 20.00
$ 24.40
$ 20.00
6
$ 242.00
$ 100.00
$ 142.00
$ 40.33
$ 16.67
$ 23.67
$ 23.00
7
$ 265.00
$ 100.00
$ 165.00
$ 37.86
$ 14.29
$ 23.57
$ 30.00
8
$ 295.00
$ 100.00
$ 195.00
$ 36.88
$ 12.50
$ 24.38
$ 38.00
9
$ 333.00
$ 100.00
$ 233.00
$ 37.00
$ 11.11
$ 25.89
$ 40.00
10
$ 373.00
$ 100.00
$ 273.00
$ 37.30
$ 10.00
$ 27.30
Explanation / Answer
A) when Mc<ATC then ATC always decreases
B) AFC decreases as we increase Q because AFC=TFC/Q where TFC remains fixed and as we increase Q, TFC fix, AFC decreases.
C)initially marginal cost decreases then increases which makes initially MP rises and then start falling leading to satisfy the principle of Law of Variable proportion.
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