3.3.2 costs

Question 1

what is the formula for total costs?

Answer 1

total costs = fixed cost + variable cost
TC = FC + VC

Question 2

what are fixed costs?

Answer 2

fixed costs don’t vary with output, they are constant and have to be paid even if the firm produces nothing eg. rent, insurance, loan payments

Question 3

what are variable costs?

Answer 3

costs that vary directly with output. when output increases, costs for things such as raw materials, labour increase. variable costs are zero when there is no output

Question 4

what is the formula for average total cost?

Answer 4

average total cost = total costs / quantity
ATC = TC / Q = AFC + AVC

Question 5

what is the formula for average fixed cost?

Answer 5

average fixed cost = fixed costs / quantity
AFC = FC / Q

Question 6

what is the formula for average variable cost?

Answer 6

average variable cost = variable costs / quantity
AVC = VC / Q

Question 7

what is the formula for marginal cost?

Answer 7

marginal cost = change in total cost / change in quantity.
represents the amount added to the total cost of production by the next unit of output

Question 8

explain the shape of short-run cost curves

Answer 8

-before the optimal factor combination, there are increasing returns when FOPs are increased. this means that when input is doubled, output is more than doubled, therefore the average total cost is decreasing due to low marginal cost
-the optimal factor combination is reached at Q* where the fixed factor becomes saturated
-after the optimal, there are diminishing marginal returns when new FOPs are employed. when inputs are doubled, outputs are less than doubled and average total cost increases

Question 9

what is the relationship between ATC and MC?

Answer 9

If the marginal cost is greater than the average cost, the average is increased. If the marginal cost is lower than the average cost, the average cost is pulled down