Question

An accountant for Abington Cubic Car Rental Company was recently asked to report the firm's costs of producing various levels of output. The accountant knows that the most recent estimate available of the firm's cost function is: C(Q) = 150,000 + 25Q + 8Q2 + 6Q3 Where costs are measured in thousands of dollars and output is measured in thousands of hours rented.

a. What is the average fixed cost of producing 20 units of output?

b. What is the average variable cost of producing 20 units of output?

c. What is the average total cost of producing 20 units of output?

d. What is the marginal cost of producing 20 units of output?

e. What is the relation between the answers to a., b., and c. above?

f. To expand into a new business opportunity, Abington Cubic Car Rental Company must obtain a license from the township for $20,000. The license is transferable, but only $3,000 is refundable in the event the firm does not use the license. What are the firm's fixed costs? Sunk costs? Suppose Abington Cubic Car Rental Company obtains a license but then decides against opening the business. If another firm offers the manager $2,000 for the license, should Abington-Telecall accept the offer?

Answer 1

C =  150,000 + 25Q + 8Q2 + 6Q3
At Q = 20; C = 150,000 + 25(20) + 8(20)2 + 6(20)3 = 150,000 + 500 + 3200 + 48000 = 201,700
Total Fixed Cost(TFC) = 150,000
Total Variable Cost, TVC = 25Q + 8Q2 + 6Q3 = 25(20) + 8(20)2 + 6(20)3 = 500 + 3200 + 48000 = 51,700

a. Average Fixed Cost, AFC = TFC/Q = 150,000/20 = 7500

b. Average Variable Cost, AVC = TVC/Q = 51,700/20 = 2585

c. Average Total Cost, ATC = C/Q = 201,700/20 = 10,085

d. Marginal cost. MC =
At Q = 20, MC = 25 + 16(20) + 18(20)² = 25 + 320 + 7200 = 7545

e. We can see from a, b, and c that ATC = AVC + AFC
As, AVC + AFC = 2585 + 7500 = 10,085 = ATC

Note: Post four subparts at a time.