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.
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 )
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
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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