Owen owns a business making coffee mugs. He is currently trying to figure out his cost structure for the month. Each month, he has to pay $1,000 for rent and machinery. For every mug he produces, it costs him $20 in material and $10 in wages.
(a) Which costs are fixed? Which costs are variable? Explain. (b) What is the total cost function? (c) Derive the average total cost, average variable cost, and average fixed cost functions.
a ) Ans: Rent and machinery costs are fixed costs and material cost and wages are variable costs.
Explanation:
Fixed costs are those costs which remain constant throughout the subsequent level of production whereas variable costs are varying with the level of production.
b ) Ans: TC = FC + VC (q )
Explanation:
Total cost function = total fixed cost + variable cost ( q)
Where , q = number of units produced
c ) Ans: ATC = TC / Q , AVC = TVC / Q and AFC = TFC / Q
Explanation:
In the above functions;
ATC = Average total cost
TC = Total costs
AVC = Average variable costs
TFC = Total fixed cost
q = Number of units produced or quantity
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