Tutorial 5 Solutions
CHAPTER 7
PROBLEMS
3.
Q
0
1
2
3
4
5
6
7
8
9
10
5.
TC
120
265
384
483
568
645
720
799
888
993
1120
TFC
120
120
120
120
120
120
120
120
120
120
120
TVC
0
145
264
363
448
525
600
679
768
873
1000
AC
X
265
192
161
142
129
120
114.1
111
110.3
112
AF
X
120
60
40
30
24
20
17.1
15
13.3
12
AVC
X
145
132
121
112
105
100
97
96
97
100
MC
145
119
99
85
77
75
79
89
105
127
The following table represents all the relevant cost data for quantities 1 to 10. It has been
assumed that the constant term in the equation (equaling 50) represents fixed cost. Marginal
costs have been calculated as the differences in total cost as one unit of quantity is added (rather
than using calculus. The interested student can make this calculation).
Quantity
0
1
2
3
4
5
6
7
8
9
10
a.
Total
Fixed
Cost
50
50
50
50
50
50
50
50
50
50
50
Total
Variable
Cost
0.00
14.20
26.60
35.40
44.80
55.00
67.20
82.60
102.40
127.80
160.00
Average
Total
Cost
50.00
64.20
75.60
85.40
94.80
105.00
117.20
132.60
152.40
177.80
210.00
Average
Fixed
Cost
Variable
Cost
Total
Cost
Marginal
Cost
50.00
25.00
16.67
12.50
10.00
8.33
7.14
6.25
5.56
5.00
14.20
12.80
11.80
11.20
11.00
11.20
11.80
12.80
14.20
16.00
64.20
37.80
28.47
23.70
21.00
19.53
18.94
19.05
19.76
21.00
14.20
11.40
9.80
9.40
10.20
12.20
15.40
19.80
25.40
32.20
TC ($)
250
200
150
Total Cost
100
50
0
0
1
2
3
4
5
6
7
8
9
10
Q
Figure 7.6
b. All data are shown in the table above.
40
$
35
30
25
Average Cost
20
Marginal Cost
Average Var Cost
15
10
5
0
0
1
2
3
4
5
6
7
8
9
10
Q
Figure 7.7
c. Grand Corporation has a cubic cost function. This means that it passes through all three cost
areas. Looking at the marginal cost curve, decreasing marginal costs prevail until 4 units are
produced, after which increasing marginal costs are present. As the marginal cost passes
from decreasing to increasing, it arrives at a minimum point at which it is constant.
7.
Instructors should have an interesting time discussing this question. We recommend that this
question be answered in class by small groups of students (perhaps 4 to 6). Each group should
be allowed a short time to discuss the problem and to reach a consensus about the cost estimate.
We have found that it is extremely rare for two groups to arrive at the same estimate. We have
also found that groups may not be able to agree upon a single estimate.
There is no unique answer to this question because it all depends on the assumptions that one
makes about the cost conditions. However, based on the strict criteria of relevant cost (i.e.
incremental or variable cost), we suggest that the following estimate:
Boat fuel
Travel expenses (gas, oil, and tires only)
Bait, etc.
Food
Beverages
$45
18
50
40
35
$188 or $9.40 per fish
Of course, it can also be argued that a certain amount of the food and beverage costs should not
be included because he would incur these costs regardless of whether he goes fishing. Also, at
the risk of stirring up a heated debate, instructors may also wish to consider the opportunity cost
of Sarah’s time in cleaning the fish (and in fact why she has to clean the fish in the first place!)