Assignment
In this assignment, you will define and calculate the remaining six major cost elements of a business when given the total costs and the quantity produced, as well as use the computed costs to determine a minimum cost output level for that business.
In addition, you will also clearly explain how the average total cost of a new output level is affected by its share of fixed costs and variable costs.
Questions
1. When ONLY total costs (TC) are known, such as shown in Table 1 below, explain how to calculate each of the following and provide at least one step-by-step example using the data from Table 1:
a. Fixed costs (FC)
b. Variable costs (VC)
c. Average variable costs (AVC)
d. Average total costs (ATC)
e. Average fixed costs (AFC)
f. Marginal costs (MC)
2. Table 1 shows the hourly production and total cost estimates for a new manufacturing firm wishing to enter the smartphone market. Fill in the blank cells in columns a., b., c., d., and e. on the table by computing the appropriate values.
Table 1
Smart cell phones produced in an hour Total Cost (TC) Variable Costs (VC)
a. Average Variable Costs (AVC)
b. Average Total Costs (ATC)
c. Average Fixed Cost (AFC)
d. Marginal Cost (MC)
e. 0 $3,200
15 $3,525
30 $3,875
45 $4,250
60 $4,650
75 $5,075
90 $5,525
105 $6,725
120 $8,210
135 $9,950
3. Based on your calculations in completing the table in Question 2, what is this manufacturer’s minimum cost output level? Explain your answer.
4. According to the Chapter 11 section covering “Average Total Cost” in your textbook, when one additional unit is produced, two factors directly impact the change in average total costs, the spreading effect, and the diminishing returns effect. In the following two situations, identify which effect is occurring, the spreading effect or the diminishing returns effect, and explain why.
a. Production of the 10th gizmo resulted in an average total cost (ATC) of $20, but production of the 11th gizmo resulted in an average total cost of $22.
b. Production of the 10th gizmo resulted in an average total cost (ATC) of $20, but production of the 11th gizmo resulted in an average total cost of $18.
