E303
Davis, Spring 2006
Problem Set #10
Costs of the Firm
1. Short run costs for the firm. Consider a firm with the following Fixed Costs and
Marginal Costs
Q
0.00
TFC
15.00
TVC
0.00
TC
15.00
MC
AFC
AVC
ATC
1.00
15.00
3.00
18.00
3.00
15.00
3.00
18.00
2.00
15.00
5.00
20.00
2.00
7.50
2.50
10.00
3.00
15.00
6.00
21.00
1.00
5.00
2.00
7.00
4.00
15.00
8.00
23.00
2.00
3.75
2.00
5.75
5.00
15.00
13.00
28.00
5.00
3.00
2.60
5.60
6.00
15.00
22.00
37.00
9.00
2.50
3.67
6.17
7.00
15.00
36.00
51.00
14.00
2.14
5.14
7.29
8.00
15.00
56.00
71.00
20.00
1.88
7.00
8.88
a) Total Costs
a. Fill in the blanks for TVC and TC Construct a graph that illustrates the
TVC, TFC, and TC curves
80.00
TC
70.00
60.00
TVC
50.00
MC
40.00
30.00
TFC
20.00
10.00
0.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
b. On this graph, show how MC may be illustrated (at any arbitrary point)
At any point, MC is the slope of the line tangent to the curve
b) Unit Costs
a. Fill in the blanks for AVC, AFC and ATC
See table above
b. Construct a graph that illustrates MC,AVC, and ATC
25
MC
20
15
ATC
10
AVC
5
0
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
c. What is the relationship between AVC and ATC? Why?
Relationship _The curves approach each other as quantity expands.
Reason: The difference between them is AFC
d. What is the relationship between MC and AVC? MC and ATC? Why?
Relationship MC cuts both AVC and ATC at their minimum points
Reason: The Marginal Drives the average
Production for a firm in the Short Run.
a. In general, how should the firm determine the optimal output level?
Rule:_Compare MR (price) to MC________________.
b. Referring again to table 1, if the price is $10 per unit, how much should
the firm produce? Illustrate this result in your unit cost figure. Is the firm
earning economic profits at that level of output?
The firm should produce 6 units. The firm is earning profits because at a price of $10 AR
(=P) exceeds ATC.
c. What is the minimum price at which the firm would produce? Why?
Shutdown point:_When price is such that P=MC = AVC. Here at an output of 4, (and
AVC=MC = 2
At prices below $2, the firm would not only lose it’s fixed costs, but it would also be
paying variable costs to produce
d. When does the firm breakeven? Why?
Breakeven point: When price is such that P = MC = ATC. At this point the firm just
covers all costs of operation.