Question

Use the table below to answer the following questions.

Output	Fixed Cost	Variable Cost	Total Cost	Average Fixed Cost	Average Variable Cost	Average Total Cost	Marginal Cost
0	10
1	20	7
2	20		32		6
3	20		41	6.67		13.67
4	20	40
5	20	75
6	20	132		3.33		25.33
7			237	2.86	31	33.86
8	20		356
9	20		515	2.22		57.22
10	20	700		2

A) What is the firm’s minimum efficient scale?

B) How much are the firm’s sunk fixed costs?

C) Explain the difference between sunk and non-sunk fixed costs and provide an example of each.

D) Explain why it is that long-run average cost is always at least as low as short-run average cost.

Answer 1

A) The efficient scale is attained at where the average cost is minimum. This is at third level of output.

B) Sunk cost is 10

C) Sunk cost is the cost which is irrecoverable. Example cost on training the workers or R&D. Non sunk cost includes cost on rent, machinary, building etc. that is recoverable

D) It is because the long run cost curve is the envelope curve of the short run average cost curves.