Question

Use the following table to answer questions a-c.

Output (Q):                      0          1          2          3         4      5        6

Total Cost (TC):            $37      $45      $52      $61     $74     $91     $110

a. What is the average fixed cost of producing 3 units of output?

b. What is the marginal cost of producing the third unit of output?

c. At what level of output does the firm encounter diminishing marginal returns? How do you know?

Answer 1

Ans.

output ( Q)	TC	TFC	TVC	MC
0	$37	$37	0	--
1	$45	$37	$8	$8
2	$52	$37	$15	$7
3	$61	$37	$24	$9
4	$74	$37	$37	$13
5	$91	$37	$54	$17
6	$110	$37	$73	$19

Note: 1) when Q= 0 , TC = TFC = $37

2) TVC = TC - TVC

3) MCn = TCn - TCn-1 or TVCn - TVCn-1

a) AFC = TFC / Q

when Q = 3 units,

AFC = $37 / 3 units

AFC = $12.33

b) MC₃= TC₃ - TC₂

= $61 - $52 = $9

c) At Q =3 units of output, the firm encounter diminishing marginal return because when adding one more variable inputs then at the given output level marginal cost starts increasing.