Question

Essay Question 2. Table I shows the output levels of a firm producing hand sanitizer: Output (units): 0, 10, 18, 28, 36, 45/48. The cost function of the firm is given as C = 30 + 4q, where C is the total cost and q is the units produced.
(a) Calculate the total cost in dollars of producing (i) 18 units (ii) 36 units.
(b) Calculate the average cost in dollars of producing (i) 28 units (ii) 45 units.
(c) What is the marginal cost in dollars of producing 28 units?
(d) Determine the profit made from producing 45 units when the market price is fixed at $5.00 per unit.
(e) Determine the fixed cost of the firm. Explain your answer.

Accepted Answer

(a)(i) TC at 18 units = 30 + 4(18) = 30 + 72 = $102.
(ii) TC at 36 units = 30 + 4(36) = 30 + 144 = $174.
(b)(i) Average cost (ATC) at 28 units: TC = 30 + 4(28) = 30 + 112 = $142; ATC = TC/Q = 142/28 = $5.07.
(ii) At 45 units: TC = 30 + 4(45) = 30 + 180 = $210; ATC = 210/45 = $4.67.
(c) Marginal Cost (MC) = change in total cost / change in output. TC of 28 units = $142; TC of 18 units = $102. MC = (142-102)/(28-18) = 40/10 = $4.
(d) Profit = TR - TC. At 45 units, TR = Price x Quantity = $5 x 45 = $225. TC at 45 units = $210. Profit = 225 - 210 = $15.
(e) Fixed Cost (FC) is the cost of production that does not change with output, even at zero output. From C = 30 + 4q, at q = 0, C = 30 + 4(0) = $30. Therefore the fixed cost of the firm is $30 (the variable cost, 4q, varies directly with output, while FC of $30 remains constant across all levels).

NABTEB Economics 2013 Theory — Question 2

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