Microeconomics: Average Fixed and Variable Costs

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Questions and Answers

What is the formula to calculate average total cost (ATC)?

ATC = TC/Q or ATC = AFC + AVC

What is the shape of the average total cost curve and why?

The ATC curve is 'U' shaped, reflecting the onset of diminishing returns to the variable factor.

What is the mathematical representation of the total cost of a business firm in the short run?

TC = TFC + TVC

How is marginal cost calculated from total cost data?

MC = TCn - TCn-1 or MC = ∆TC/∆Q Signup and view all the answers

What is the shape of the total fixed cost curve on the cost graph?

Horizontal line Signup and view all the answers

What is the significance of marginal cost in the theory of the firm?

Marginal cost is the leading cost curve, as changes in total and average costs are derived from changes in marginal cost. Signup and view all the answers

What is the source of marginal cost?

Marginal cost is derived solely from variable costs. Signup and view all the answers

What is the relationship between average fixed cost and output?

Average fixed cost falls as output increases Signup and view all the answers

What is the shape of the total variable cost curve on the cost graph?

Sloping up at an accelerating rate Signup and view all the answers

What is the shape of the marginal cost curve?

The marginal cost curve falls briefly at first, and then rises. Signup and view all the answers

What is the formula to calculate the Average Fixed Cost (AFC)?

AFC = TFC/Q Signup and view all the answers

Describe the shape of the Average Variable Cost (AVC) curve and explain why it takes that shape.

The AVC curve is 'U' shaped, initially sloping down, then reaching a minimum point, and finally rising again. This is due to the principle of variable proportions, which leads to increasing returns, constant returns, and eventually diminishing returns to the variable factors. Signup and view all the answers

What is the position of the total cost curve on the cost graph influenced by?

The amount of fixed costs Signup and view all the answers

What is the formula to calculate the Average Variable Cost (AVC)?

AVC = TVC/Q Signup and view all the answers

How is the total cost curve derived on the cost graph?

By adding total fixed and total variable costs Signup and view all the answers

What is the relationship between the output level and the Average Fixed Cost (AFC)?

As the output level increases, the Average Fixed Cost (AFC) decreases. Signup and view all the answers

What is the significance of Average Total Cost (ATC) in the theory of the firm?

ATC indicates how efficiently scarce resources are being used. Signup and view all the answers

How does the Average Variable Cost (AVC) curve initially behave as the output level increases?

The AVC curve initially slopes down as the output level increases, indicating decreasing average variable costs. Signup and view all the answers

Study Notes

Cost Concepts

Average Total Cost (ATC) is the sum of Average Fixed Cost (AFC) and Average Variable Cost (AVC)
ATC curve is 'U' shaped due to the shape of the AVC curve and the law of diminishing returns

Marginal Cost

Marginal Cost (MC) is the cost of producing one extra unit of output
MC can be found by calculating the change in Total Cost (TC) when output is increased by one unit
MC is derived solely from variable costs, not fixed costs
The MC curve falls briefly at first, then rises due to the principle of variable proportions

Average Fixed Cost

Average Fixed Cost (AFC) is found by dividing Total Fixed Cost (TFC) by output
The AFC curve slopes down continuously from left to right as output increases

Average Variable Cost

Average Variable Cost (AVC) is found by dividing Total Variable Cost (TVC) by output
The AVC curve is 'U' shaped due to the principle of variable proportions, showing increasing, constant, and diminishing returns to the variable factor

Total Cost

Total Cost (TC) is the sum of Total Fixed Cost (TFC) and Total Variable Cost (TVC)
TC includes all money costs
The TC curve is found by adding TFC and TVC curves, reflecting the amount of fixed costs and the gradient of variable costs