BUIL1149 – PROPERTY ECONOMICS
TUTORIAL WEEK 5 SOLUTIONS
Question 1
a) Explain the meaning of each of the abbreviated column headings in the preceding table.
Item
TVC
Description
This measures the portion of a firm’s costs that vary with
production levels. The greater the level of production, the more
variable cost. Examples include: labour, capital equipment, raw
materials, etc.
Total Variable Cost
TFC
Total Fixed Cost
This measures the portion of a firm’s costs that are fixed and do
not vary with production levels. These costs are incurred
regardless of output. Examples include: rent, utilities, rates,
insurance, etc.
TC
Total Cost
The sum of Total Variable Cost and Total Fixed Cost
=
AFC
Average Fixed Cost
+
The average fixed cost per unit of output. This is calculated as
Total Fixed Cost divided by the quantity of output:
=
Where Q = output
AVC
Average Variable
Cost
The average variable cost per unit of output. This is calculated as
Total Variable Cost divided by the quantity of output:
=
ATC
Average Total Cost
The average total cost per unit of output. This is calculated as
Total Cost divided by the quantity of output or the sum of
Average Fixed Cost and Average Variable Cost:
=
MC
Marginal Cost
=
+
The amount of cost incurred for an additional unit of output. It
can be calculated by the rate of change of TC with respect to
output:
∆
=
∆
Note that MC may be non constant and change with the level of
output, Q.
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b) Fill in all the missing cells of this table where there is a question mark (“?”). Note: where there is a dash no entry is required. Why do you suppose?
No. Of homes
0
1
2
3
4
5
6
7
TVC
0
400-250=150
490-250=240
320
660-250=410
102*5=510
620
740
TFC
250-0=250
250
250
250
250
250
250
250
TC
400-150=250
400
245*2=490
320+250=570
660
510+250=760
620+250=870
740+250=990
AFC
250/1=250
250/2=125
250/3=83.3
250/4=62.5
250/5=50
250/6=41.6
250/7=35.7
AVC
150/1=150
240/2=120
320/3=106.67
410/4=102.5
102
620/6=103.3
740/7=105.7
ATC
250+150=400
245
83.3+106.67=190
660/4=165
50+102=152
41.6+103.3=145
35.7+105.7=141.42
MC
150
490-400=90
570-490=80
660-570=90
760-660=100
870-760=110
990-870=120
AFC, AVC and ATC cannot be calculated when Output (No. Of homes) is zero as it requires division by zero and therefore undefined.
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c) From the information in the completed table, graph all the short run total cost curves.
$1,200
$1,000
$800
$600
$400
$200
$0
0
1
2
3
4
5
6
7
Number of Homes
TVC
TFC
TC
d) Graph all the average costs curves including the marginal cost curve in one chart. Describe what
is meant by Efficient Scale? On the chart that you have drawn, identify the point where this
manifests itself.
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
1
2
3
4
5
6
7
Number of Homes
AFC
AVC
ATC
MC
Efficient Scale refers to the point where Average Total Costs are minimised. It can be identified by
the point where the Marginal Cost curve intersects the Average Total Cost curve. This has not yet
occurred. The Marginal Cost and Average Total Cost curves begin to approach each other when
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production is 7 homes. At 7 homes, MC = $120 and ATC = $141.42. MC is trending upwards while
ATC is trending downwards. At some point beyond 7 homes, the two curves will intersect resulting in
efficient scale. Therefore, the firm should continue production beyond 7 homes as it has not yet
reached the efficient scale where costs are minimised.
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