Costs of the individual firm

Activity 26

M. I. Fortunate?

• No!• Your true economic profit from going into

business for yourself is $-3,000. , and this is a return of -3%.

• The foregone salary of $50,000 and the foregone interest income of $8,000 are opportunity costs, so going into business for herself, cost IM $3,000.

• She might not view this as a loss if she places a dollar value on the “psychic income or benefit” of working for herself rather than the corporation

Aggregate and Unit Cost structureAggregate Cost Data Unit Cost Data

Output Total

Fixed

Cost

Total

Variable Cost

Total

Cost

Marginal

Cost

(▲TC/ ▲Q)

Average

Fixed

Cost

Average

Variable

Cost

Average

Total

Cost

0 $500 $0 $500

100 500 700 1,200 $7.00 $5.00 $7.00 $12.00

200 500 1,300 6.00 2.50 6.50 9.00

300 500 2,300 5.00 1.67 6.00

400 500 2,400 6.00 1.25 6.00 7.25

500 500 3,100 3,600 7.00 1.00 6.20

600 500 4,320 7.20 0.83 6.37 7.20

700 500 7,400 5,200 0.71 6.71 7.42

Aggregate and Unit Cost structureAggregate Cost Data Unit Cost Data

Output Total

Fixed

Cost

Total

Variable Cost

Total

Cost

Marginal

Cost

(▲TC/ ▲Q)

Average

Fixed

Cost

Average

Variable

Cost

Average

Total

Cost

0 $500 $0 $500

100 500 700 1,200 $7.00 $5.00 $7.00 $12.00

200 500 1,300 1,800 6.00 2.50 6.50 9.00

300 500 1,800 2,300 5.00 1.67 6.00 7.67

400 500 2,400 2,900 6.00 1.25 6.00 7.25

500 500 3,100 3,600 7.00 1.00 6.20 7.20

600 500 3,820 4,320 7.20 0.83 6.37 7.20

700 500 7,400 5,200 8.80 0.71 6.71 7.42

$6,000A

GG

RE

GA

TE

C

OS

T

$5,500

$5,000

$4,500

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

AGGREGATE COST DATA

QUANTITY OF OUTPUT

$100 $200 $300 $400 $500 $600 $700

$6,000A

GG

RE

GA

TE

C

OS

T

$5,500

$5,000

$4,500

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

AGGREGATE COST DATA

QUANTITY OF OUTPUT

$100 $200 $300 $400 $500 $600 $700

FC

VC

TC

4. How is Marginal Cost represented in the

Aggregate Cost Graph?

4. How is Marginal cost represented in the Aggregate Cost Graph?

• It is the slope of the Total Cost curve

–Move up $700, move over 100

–The rise over the run

$12U

NIT

CO

ST

($

PE

R U

NIT

)

$11

$10

$9

$8

$7

$6

$5

$4

$3

$2

$1

UNIT COST DATA

NOTE: Marginal Cost is plotted

between output levels

QUANTITY OF OUTPUT

100 200 300 400 500 600 700

MC

ATC

AVC

AFC

5. On the graph of Unit Cost Data, where is Total Cost per Unit (or Average

Total Cost, ATC) at its minimum level of output?

5. On the graph of Unit Cost Data, where is Total Cost per Unit (or Average Total Cost, ATC) at its

minimum level of output?

• From, or between 500 to 600 units of output

6. On the graph of Unit Cost Data,

where is Variable Cost per Unit (or Average

Variable Cost, AVC) at its minimum level of output?

6. On the graph of Unit Cost Data, where is Variable Cost per Unit (or Average Variable Cost, AVC) at its minimum

level of output?

• From or between 300 and 400 units of output

7. On the graph of Unit Cost Data,

what is the relationship between Marginal Cost (MC)

and Average Total Cost (ATC), when Average Total

Cost is at its minimum level of output?

•They are equal

7. On the graph of Unit Cost Data, what is the relationship between Marginal Cost (MC) and

Average Total Cost (ATC), when Average Total Cost is at its minimum level of output?

8. On the graph of Unit Cost Data,

what is the relationship between Marginal Cost (MC) and Average Variable Cost

(AVC), when Average Variable Cost is at its

minimum level of output?

•They are equal

8. On the graph of Unit Cost Data, what is the relationship between Marginal Cost (MC) and Average Variable Cost (AVC), when Average

Variable Cost is at its minimum level of output?

9. Explain why marginal cost, on a unit-cost graph, meets average total cost and average variable cost at their minimum points?

9. Explain why marginal cost, on a unit-cost graph, meets average total cost and average variable cost at their minimum points?

• By definition• If ATC (TC/Q) and AVC (VC/Q) fall when MC (▲TC/ ▲Q)

is below them, as they must and• If ATC (TC/Q) and AVC (VC/Q) rise when MC (▲TC/

▲Q) is above them, as they must• ERGO - You have to pass through a minimum when you

stop falling and start rising• Suppose your quiz average is 4 out of 5.

– If on your next quiz (marginal score) you score 3 out of five, your average would drop.

– If on the following quiz (marginal score) you score 4 out of 5, your average would rise – as your marginal score has just passed through the minimum level of your average score

10. On the graph of Unit Cost Data, what does the vertical distance between the TC/Q (ATC) curve and

the VC/Q (AVC) curve represent?

• FC/Q or Average Fixed Cost (AFC)

10. On the graph of Unit Cost Data, what does the vertical distance between the TC/Q (ATC) curve

and the VC/Q (AVC) curve represent?

11. Explain why fixed cost has no influence

on marginal cost.

11. Explain why fixed cost has no influence on marginal cost.

• By definition

• Fixed cost does not change as output increases

• Marginal cost, by definition, is the change in total cost as output changes

• ERGO- fixed cost, which does not change, can have no influence on the changes in cost measured by marginal cost

– Marginal cost measures the changes in variable costs as output increases