Running head: COST ELEMENTS OF A BUSINESS

Cost Elements of a Business

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COST ELEMENTS OF A BUSINESS

Cost Elements of a Business

Question 1
a. Fixed cost
These are production costs that do not change with quantity of output produced.
= cost incurred when zero units are produced
b. variable cost
These are cost those changes depending on the output given by the difference between total cost
and fixed cost.
= TC FC
c. Average variable cost
Its the variable cost per output.
= VC/Q
d. Average total cost
Its the average cost per unit.
= TC/Q
e. Average fixed cost
Its fixed cost per output

COST ELEMENTS OF A BUSINESS

= FC/Q
f. Marginal cost
Its the additional cost that results from increasing output by one unit. Its given by dividing
change in total cost over change in output.
=

TC/

Question 2

Table 1.
Smart
cell
phones
produce
d in an
hour

Total
Cost
(TC)

Variable
Costs
(VC)
a.

0
15
30
45
60
75
90
105
120
135

$3,200
$3,525
$3,875
$4,250
$4,650
$5,075
$5,525
$6,725
$8,210
$9,950

$325
$675
$1050
$1450
$1875
$2325
$3525
$5010
$6750

Average
Variable
Costs
(AVC)

Average
Total
Costs
(ATC)

Average
Fixed
Cost
(AFC)

Marginal
Cost (MC)

b.
n/a
21.67
22.5
23.33
24.17
25
25.83
33.57
41.75
50

c.
n/a
235
129.17
94.44
77.5
67.67
61.39
64.05
68.42
73.70

d.
n/a
213.33
106.67
71.11
53.33
42.67
35.57
30.48
26.67
23.70

e.
n/a
21.67
23.33
25
26.67
28.33
30
80
99
116

Question 3
The minimum output cost level is 90 units. This is because its the level at which minimum
average total cost is incurred.
Question 4

COST ELEMENTS OF A BUSINESS

a.

Diminishing effect

In the diminishing returns effect ,the larger the output the greater the amount of variable input
required to produce additional units hence leading to higher average variable cost. This in turn
increase average total cost. Hence, 11th Gizmo results to higher ATC of $22 which is greater
than producing 10 Gizmo at ATC of $ 20
b. Spreading effect.
In the spreading effect, the larger the output the larger the quantity of output over which fixed
cost is spread lowering fixed average cost. This in turn lowers the average total cost. Hence,
producing the 11th Gizmo results to lower average total cost of $18

COST ELEMENTS OF A BUSINESS

References
Krugman, P. (2015). First Principles. In Microeconomics (4th ed., pp. 329-356). Retrieved from
https://bookshelf.vitalsource.com/books/9781464144820
Mankiw, G. (2000) .Principles of Micro Economics, 2 ed. California: Harcourt College Pub.
Retrieved from https://www.csun.edu/sites/default/files/micro6_0.pdf