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Consider the following firm
Consider the following firm. In the short run, the fixed cost is $7210.
a. How much is the minimum of the AVC?
b. How much is the firm's technologically optimum output?
| Q | VC |
| 0 | |
| 5 | 100 |
| 10 | 1500 |
| 15 | 2500 |
| 20 | 3150 |
| 25 | 39090 |
| 30 | 4550 |
| 35 | 6050 |
| 40 | 7550 |
| 45 | 9550 |
| 50 | 12250 |
Expert Solution
a) We first compute AVC, which is calculated as follows:
- AVC = VC / Q
| Q | VC | AVC |
| 0 | ||
| 5 | 100 | 20 |
| 10 | 1500 | 150 |
| 15 | 2500 | 167 |
| 20 | 3150 | 158 |
| 25 | 39090 | 1564 |
| 30 | 4550 | 152 |
| 35 | 6050 | 173 |
| 40 | 7550 | 189 |
| 45 | 9550 | 212 |
| 50 | 12250 | 245 |
AVC is minimized when Q is equal to 5.
b) Optimal output is when average total cost is minimized, which is calculated below:
| Q | VC | AVC | AFC | ATC |
| 0 | ||||
| 5 | 100 | 20 | 1442 | 1462 |
| 10 | 1500 | 150 | 721 | 871 |
| 15 | 2500 | 167 | 481 | 647 |
| 20 | 3150 | 158 | 361 | 518 |
| 25 | 39090 | 1564 | 288 | 1852 |
| 30 | 4550 | 152 | 240 | 392 |
| 35 | 6050 | 173 | 206 | 379 |
| 40 | 7550 | 189 | 180 | 369 |
| 45 | 9550 | 212 | 160 | 372 |
| 50 | 12250 | 245 | 144 | 389 |
Average total cost is minimized when Q = 40. So the technically optimal output is 40.
AVC:
Average variable cost (AVC) is the total variable cost divided by the quantity of output. Average variable cost plus average fixed cost is equal to average total cost.
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