A. Fill in the formula for AFC, AVC, ATC, and MC at the top of the column in the
ID: 1235103 • Letter: A
Question
A. Fill in the formula for AFC, AVC, ATC, and MC at the top of the column in the gray section within the table. B. Fill in the missing values for TFC, TVC, AFC, AVC, ATC, and MC in the blue sections of the table.
Output
Total Fixed Cost
Total Variable Cost
Total Cost
Average Fixed Cost
Average Variable Cost
Average Total Cost
Marginal Cost
0
$600
5
900
10
1,150
15
1,350
20
1,600
25
1,900
30
2,275
35
2,725
40
3,375
45
4,225
50
5,325
C. Identify the efficient scale of firm. Explain your reasoning.
Part II. Consider the values in the following table for the Winsome Widget Factory
Winsome Widget Factory
Output
Long Run Average Total Cost
0
------------------
5
170
10
110
15
85
20
83
25
78
30
75
35
75
40
80
45
82
50
97
a. Over what output levels do economics of scale occur? Explain.
b. Over what output levels do constant returns to scale occur? Explain.
c. Over what output levels do diseconomies of scale occur? Explain.
Output
Total Fixed Cost
Total Variable Cost
Total Cost
Average Fixed Cost
Average Variable Cost
Average Total Cost
Marginal Cost
0
$600
5
900
10
1,150
15
1,350
20
1,600
25
1,900
30
2,275
35
2,725
40
3,375
45
4,225
50
5,325
Explanation / Answer
A, B.
TFC TVC AFC AVC ATC MC
600 0 0 0 0 -
600 300 120 60 180 300
600 550 60 55 115 250
600 750 40 50 90 200
600 1000 30 50 80 250
600 1300 24 52 76 300
600 1675 20 55.83 75.83 375
600 2125 17.14 60.71 77.85 450
600 2775 15 69.375 84.375 650
600 3625 13.33 80.55 93.88 850
600 4725 12 94.5 106.5 1100
When output is zero, total cost is 600. Hence total fixed cost (TFC) remains constant i.e 600 when output increases. Once you know TFC, TVC is calculated as Total cost(TC)-TFC. AFC is calculated by TFC/output. AVC is calculated as TVC/output. ATC is calculated by TC/output. Marginal cost when output is zero does not occur but as output increases it is calculated by, (900-600, 1150-900, 1350-1150 and so on).
C.
Here with the increase in the rate of output marginal cost is increasing at an increasing rate. Therefore diminishing returns to scale occurs.
Part II:
a) At output levels ranging between 40-50. Economies of scale refers to the situation in which increase in the scale of production gives rise to certain benefits to the producers. Here we can see with the increase in output long run average total cost increases.
b) At output levels 30 and 35. Here increase in output is in the same proportion as increase in the long run average total cost. Hence returns to scale is constant.
c) At output level ranging between 5-30.Here scale of production has decreased resulting in diseconomies of scale.
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