Question

a) Use the data in the table and calculate the average costs and the marginal cost

Output(units)	Total cost	AFC	AVC	ATC	MC
0	$400
10	540
20	620
30	810
40	910

b) Discuss the relationship between ATC and MC. Also draw a graph showing both curves.

Answer 1

A)

Output	total cost	total fixed cost (TFC)	total variable cost (TVC)	average fixed cost(AFC)	average variable cost(AVC)	average total cost(ATC)	marginal cost(MC)
0	400	400	0	-----	-------	-----	----
10	540	400	140	40	14	54	140
20	620	400	220	20	11	31	80
30	810	400	410	13.33	13.66	27	190
40	910	400	510	10	12.75	22.75	100

To find AFC and AVC we first need to find the TFC and TVC.

1) Total Fixed cost at 0 output is 400. So FC for every level will be 400.

2)Total cost = total fixed cost + total variable cost

Total variable cost= total cost - total fixed cost

Eg - (output 10). Total variable cost= 540-400= 140

3) Average fixed cost = Total fixed cost/output

Eg (output 10). AFC = 400/10 = 40

4) Average variable cost= Total variable cost/ output

Eg(output 10). AVC = 140/10= 14

5) Average total cost= Total cost/ output or AFC + AVC

Eg(output 10). ATC = 540/10 = 54. or. 40+14= 54

6) Marginal cost = Difference of Total cost of 2 levels of output

Eg(output 10) MC = Total cost of output 10 - Total cost of output 0

= 540 - 400= 140

Eg(output 20) MC= TC of output 20 - TC of output 10

= 620-540 = 80.