Question

Mark and Jeff operate a small company that produces souvenir footballs. Their fixed cost is $2,000 per month. They can hire workers for $1,000 per worker per month. Their monthly production function for footballs is as given in the accompanying table.

Quantity of labor	Quantity of footballs
0	0
1	300
2	800
3	1,200
4	1,400
5	1,500

(a) For each quantity of labor, calculate average variable cost (AVC), average fixed cost (AFC), average total cost (ATC), and marginal cost (MC).

(b) On one diagram, draw the AVC, ATC, and MC curves.
(c) At what level of output is Mark and Jeff’s average total cost minimized?

Answer 1

Solution:-

(a) Working notes:

(1) VC = 1,000 x Number of workers (L)

(2) TC = FC + VC

(3) AVC = VC/ Quantity (Q)

(4) AFC = FC / Q

(5) ATC = TC / Q

(6) MC = Change in TC / Change in Q

(b)

(c) ATC is minimized when output is 1200.