Question

# Owen owns a business making coffee mugs. He is currently trying to figure out his cost...

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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