Question

. The information related to the cost structure of the firm is given below.

No of Labour	Total Output (Q)	Total Cost (TC)
0	0	25
1	4	50
2	10	75
3	13	100
4	15	125
5	16	150

i. Calculate total fixed cost and total variable cost

ii. Calculate marginal cost, the average variable cost, and average total cost.

iii. Draw the graphical relationship among these cost curves.

iv What is the shape of the AFC curve and why does it have this shape?

Answer 1

(i) and (ii) use the following formulas:

Total fixed cost = total cost when 0 units are produced

Total variable cost = total cost - fixed cost

Marginal cost = change in total cost due to additional output.

AVC = TVC / Q

ATC = TC/Q

Labor	Q	TC	TFC	TVC	MC	AVC	ATC
0	0	25	25	0	-	-	-
1	4	50	25	25	25	6.25	12.5
2	10	75	25	50	25	5	7.5
3	13	100	25	75	25	5.78	7.69
4	15	125	25	100	25	6.66	8.33
5	16	150	25	125	25	7.81	9.37

(III) The graph is shown below:

(iv) The AFC curve is downward sloping. This because AFC = TFC/Q Since total fixed cost is constant and Q is increaseing the AFC will always fall.