Download Answers to Homework #4

Economics 101
Spring 2005
Answer Key: Homework #4
1. a. The firm’s fixed cost is $120.
b. The firm’s minimum-cost output is achieved at the quantity that corresponds to the
minimum average total cost (ATC). In this case, the minimum-cost output is 5.
Quantity TC($)
0
120
1
180
AFC($)
AVC($)
ATC($)
MC($)
60
120
60
180
20
2
200
60
40
100
10
3
210
40
30
70
15
4
225
30
26.25
56.25
35
5
260
24
28
52
70
6
330
20
35
55
c. The MC curve must cut through the ATC and the AVC at their minimum costs.
Cost ($)
MC
ATC
AVC
4
5
Q
2.
a. Point C.
b 1) ATC 2.
2) larger, diseconomies of scale.
3.
a. The fixed cost is 190.
b. The average cost (AC)= the total cost / Q. When Q=100, the AC is {190+53(100)}/100=
1.9+53=54.9. The average variable cost (AVC) = 53Q/Q=53.
c. The marginal cost = change in total cost / change in quantity of output. The total cost
increases by 53 if the firm increases output by one unit. Thus the marginal cost is 53.
d. C=45Q+240: The new fixed cost is 190+50=240, and the marginal cost is 45. When Q=0,
the total cost is the same as the fixed cost, or C=240. When Q=1, the total cost is the fixed
cost plus the marginal cost, or 240+45(1)=285. Thus the slope of the new cost equation is
equal to the marginal cost (=45), and its y-intercept is equal to the fixed cost (=240).