Chapter 3.4 - Calculating the Costs of a Firm

Question 1

Identify the different types of cost.

Answer 1

1. TC = FC+VC
2. AC = TC/Q
3. MC = TC2-TC1/Q2-Q1
4. Total fixed cost (TFC) is a fixed/indirect/overhead cost which doesn’t vary directly with output.
5. Average fixed cost (AFC) = FC/Q
6. Total variable cost (TFC)) is a variable/direct/prime cost which varies directly with output.
7. Average variable cost (AVC) = VC/Q

Question 2

Distinguish between what is meant by ‘short run’ and ‘long run’.

Answer 2

In the short run, at least one factor of production is fixed whereas in the long run, all factors of production are variable. In the very long run, the state of technology can change.