Question

Microsoft wants to estimate the average variable cost function of producing computer diskettes. The firm believes that AVC varies with the level of output and wages. Alan Anderson, the economist in the research department the firm, collects monthly data on output (the number of diskettes produced), average variable costs, and wage rates paid by the firm over the past two years. He deflates costs and wages by their respective price indexes in order to eliminate inflationary influences. He them regresses total variable costs (TVC) on output (Q) and wages (W) and obtains the following result (where the numbers in parentheses are t values):

TVC=0.14 + 0.80Q +0.036W

(2.8) (3.8) (3.3)

R2= 0.92 D-W= 1.9

a) Which factors are statistically significant, and why?   

b) How will you explain the regression results to a layperson?

c) What is the marginal cost with respect to output (Q)?

Answer 1

a. Both the factors - Quantity and Wages are statistically significant at 5 per cent level of significance because t values calculated are higher than the t values obtained from the table at 5 per cent level of significance. So, we reject the null and claim that both output and wages are statistically significant at 5 per cent level of significance.

b. The equation above depicts total variable cost curve equation where there exists positive relationship between quantity produced and total variable cost. As quantity produced and wages in the economy will increase, the total variable cost in the economy will increase.

c. Differentiating TVC with respect to output we get marginal cost of the firm, thus, marginal cost= = 0.80.