Question

a) The following tables gives you the cost schedule for a firm producing sugar. Calculate the average costs and the marginal cost and complete the cost schedule.

Output(tons)	FC($)	VC($)	TC($)	AFC($)	AVC($)	ATC($)	MC($)
250	200	450
300	200	500
350	200	570
400	200	660
450	200	780

b) Draw the typical shapes of the average costs (AFC,AVC, ATC) and MC.

c) Explain the relationship between Marginal cost and Average total cost.

Answer 1

a)

Output	FC	VC	TC (FC + VC)	AFC (FC/Q)	AVC (TC/Q)	ATC (TC/Q)	MC (difference in total cost divided by difference in output)
250	200	450	650	0.8	1.8	2.6	-
300	200	500	700	0.667	1.667	2.33	1
350	200	570	770	0.571	1.628	2.2	1.4
400	200	660	860	0.5	1.65	2.15	1.8
450	200	780	980	o.444	1.733	2.177	2.4

b) The typical shapes will be as follows-

c) From the diagram above, we can see that ATC is a U-shaped curve. That is as the Marginal cost increases the average cost curve will decrease untill it intersects at a point with the MC curve. After the intersection, the ATC will start to increase with respect to the MC curve. Initially, the MC curve falls below the ATC even though it is rising substantially untill they meet at an interesection point.