Question

Question 1

Otto-Biscuit Industries has hired you as their economic consultant. After studying the firm quantitatively, you have generated a total cost function for the firm.

Let this function be TC = 1200 + 7Q + 4Q².

(a) From this function, derive the ATC function for Otto-Biscuit Industries.

(b) Calculate the dollar amount of average fixed costs for 300 units of output.

(c) Calculate the dollar amount of average variable costs for 700 units of output.

Please show full calculations!

Answer 1

Ans. a) TC = 1200 + 7Q + 4 Q²

ATC = TC / Q

= 1200 + 7Q + 4Q² / Q

= 1200/ Q + 7 Q/ Q + 4Q²/Q

= 1200/Q +7 + 4 Q

hence, Average total cost function is = 1200/Q + 4Q +7

Ans. b) TC = 1200+ 7Q +4Q²

when Q =0 , TC = $1200 that is TFC

it will be same at each output level

AFC = TFC /Q

when Q = 300units,

AFC = 1200/300

= $4

hence, when Q =300units, average fixed cost is $4

Ans. c) TC= TFC + TVC

TFC = $1200 and TVC = 7Q +4Q²

AVC = TVC/ Q

= 7Q + 4Q²/ Q

= 7Q/Q + 4 Q²/Q

  AVC = 7 + 4Q

when Q =700units

AVC = 7 + 4 ( 700)

= 7 + 2800

= $2807

hence, when Q = 700 units, average variable cost is $2807