Question

For a cost function of ax + b/x + k, what is each term of the cost function named?

Answer 1

The cost function is given by:

C = ax + b/x + k

In the above cost function, k is the fixed cost of production. It does not change with change in the amount of output produced (x).

The other part of the cost function ax + b/x changes with change in amount of output produced x. This the variable cost of production. Here, a is the coefficient of x and b is the coefficient of 1/x. ax shows the linear variation of cost while b/x shows that the cost increases linearly with x but at a decreasing rate.

Broadly,

k is the Fixed cost

ax + b/x is the Variable cost

a and b are the coefficients of the linear and non linear term respectively.