ECON101 Lecture Notes - Lecture 21: Average Variable Cost, Marginal Cost, Variable Cost

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mauvesquirrel844

22 Oct 2018

School

University of Alberta

Department

Economics

Course

ECON101

Professor

Gordon Lee

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ECON101 Lecture Notes - Lecture 20: Sunk Costs, Fixed Cost

ECON101 Lecture Notes - Lecture 21: Average Variable Cost, Marginal Cost, Variable Cost

ECON101 Lecture 22: Consumer Equilibrum

Document Summary

Economics 101 lecture 21: costs in the short and long run. Consider a firm where labour is the only variable input. Vc = w x l (variable cost = wage x labour) If marginal cost is greater than the average total cost, then the average total cost is rising. If marginal cost is less than the average total cost, then average total cost is falling. If marginal cost equals the average total cost, then the average total cost is at its minimum. Note that you can also apply this rule to the relationship between average variable cost and marginal costs. Q" = (cid:373)i(cid:374)i(cid:373)u(cid:373) / lowest poi(cid:374)t of the average variable cost. Q"" = (cid:373)i(cid:374)i(cid:373)u(cid:373) / lowest poi(cid:374)t of the average total cost. All costs are variable: there is no difference between average total cost (avc) and average total cost (atc) because there is no fixed costs therefore avc and atc are the same.

Related Questions

Q1) Soundscape Enterprises manufactures Sonoblast, a device that produces a high-pitched reminder to telemarketers that they have once again disturbed you just when you were sitting 1â2 down to dinner. The production function for Sonoblasts is given by the formula Q = 2KL where Q is in units of output per period, K is in machine-weeks per period, and L is in labour- weeks per period. The machine rental rate r is $512 per machine-week and the wage rate w is $128 per labour-week. In the short run, K is fixed at 4 machine-weeks per period.

a. Give the formulas for the short-run production function and the marginal product of labour (MPL) function.

b. Express variable cost (VC), total cost (TC), and marginal cost (MC) as functions of L and as functions of Q; and average variable cost (AVC), average fixed cost (AFC) and average total cost (ATC) as functions of Q.

c. At what level of Q is ATC minimized? What are the values of ATC and of MC at this level of output?

d. If K is increased to a fixed 16 units, at what level of Q is ATC minimized, and what are the values of ATC and of MC at this level of output?

e. In the long run, with all inputs variable, what is the optimal K/L ration with input prices unchanged? How many units of L and of K would be required to produce the levels of output in 1c and in 1d and what is the average cost of producing Sonoblasts in each case? Explain the relation between your results here and those for 1c and 1d.

lilacchinchilla474

1.Profit maximizing firms should increase output to the point where:

a.Total revenue is largest

b.Total revenue just exceeds total costs

c.An increase in revenue is just offset by an increase in cost.

d.Fixed costs are covered

e.Total cost is minimized

2.The Golden Rule of Output Determination for a perfectly competitive firm is to:

a.Choose the output rate at which price is greatest.

b.Choose the output rate at which marginal revenue equals marginal cost.

c.Produce to the point of diminishing marginal returns

d.Produce until total revenue exceeds total cost.

e.Choose the output rate at which total cost is the lowest.

3.Which of the following conditions would indicate that a perfectly competitive firm should expand output to increase its profit?

a.Marginal cost equals average cost

b.Total cost exceeds marginal cost

c.Price exceeds marginal cost

d.Total revenue exceeds total costs

e.Total revenue equal price

4. It would not pay a firm to produce anything in the short run if the price were:

a.Above average total costs

b.Equal to marginal cost and above the average variable cost.

c.Equal to total revenue divided by output

d.Below average variable cost

e.Below marginal average cost

rubydolphin297

3. A firm has a long-run production function:

(a) In the short run, K = 81 is fixed. Find the short-run production function. What is the marginal product of labor in the short-run?

(b) If w = 10 and r = 15.24, find the short-run cost function. To do this, first, figure out how many workers are needed to produce Q units of output, and then add up the (fixed) SR cost of capital and the cost of labor as a function of Q. How many workers are needed to produce Q = 10?

(c) Write down equations for an average total cost (ATC) and average variable cost (AVC) as a function of Q. What is ATC when Q = 10? What as AVC when Q = 10?

(d) Write down the equation for the marginal cost (MC) as a function of Q. What is the marginal cost of producing Q = 10 in the short run?

(e) Verify that MC = w*MPL, evaluating the marginal product of labor from part (3a) at the number of workers needed to produce 10 units of output.

(f) In the long run, both capital and labor are variable. Find the marginal product of labor and the marginal product of capital. Find the marginal rate of technical substitution. On a properly-labeled graph, draw an isoquant for Q = 10.

(g) Does the production function exhibit increasing, decreasing, or constant returns to scale?

(h) Find the lowest cost method of producing Q = 10 (two unknowns: K and L). To do this, equate the MRTS with the input price ratio w r (one equation) and use the isoquant for Q = 10 as the second equation.

(i) Use the fact that the cost, in the long run, is wL + rK to find the LR cost of producing Q = 10. What is the long-run average cost (LRAC) at Q = 10?

(j) (Hard) More generally, use the MRTS and the production function to find the cost of producing any quantity Q. To do this, repeat the above exercise but keep Q as an (unknown) variable, and solve for K and L as functions of Q.

(k) On a properly labeled graph, depict ATC from part (3b) and LRAC from part (3j). Why is LRAC everywhere below ATC?

(l) What is the production level at which SRAC is minimized?

salmonhyena380

ECON101 Lecture Notes - Lecture 21: Average Variable Cost, Marginal Cost, Variable Cost

ECON101 Lecture Notes - Lecture 20: Sunk Costs, Fixed Cost

ECON101 Lecture Notes - Lecture 21: Average Variable Cost, Marginal Cost, Variable Cost

ECON101 Lecture 22: Consumer Equilibrum

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