Solution of Problems - Cost Analysis

Solution of Problems (Theory and estimation of cost)
10.
The following table represents all the relevant cost data for quantities 1 to 10. It has been assumed
that the constant term in the equation (equaling 50) represents fixed cost. Marginal costs have been
calculated as the differences in total cost as one unit of quantity is added (rather than using calculus.
The interested student can make this calculation).
Quantity
0
1
2
3
4
5
6
7
8
9
10
Total
Fixed
Cost
50
50
50
50
50
50
50
50
50
50
50
Total
Variabl
e Cost
0.00
14.20
26.60
35.40
44.80
55.00
67.20
82.60
102.40
127.80
160.00
Average
Total
Cost
50.00
64.20
75.60
85.40
94.80
105.00
117.20
132.60
152.40
177.80
210.00
Average
Fixed
Cost
Variabl
e Cost
Total
Cost
Margina
l Cost
50.00
25.00
16.67
12.50
10.00
8.33
7.14
6.25
5.56
5.00
14.20
12.80
11.80
11.20
11.00
11.20
11.80
12.80
14.20
16.00
64.20
37.80
28.47
23.70
21.00
19.53
18.94
19.05
19.76
21.00
14.20
11.40
9.80
9.40
10.20
12.20
15.40
19.80
25.40
32.20
Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall
57
The Theory and Estimation of Cost

a.
250
TC ($)
200
150
Total Cost
100
50
0
0
10
Figure 7.6
b.All data are shown in the table above.
40
35
30
25
Average Cost
Marginal Cost
20
Average Var Cost
15
10
5
0
0
10
Figure 7.7
c.Grand Corporation has a cubic cost function. This means that it passes through all three cost
areas. Looking at the marginal cost curve, decreasing marginal costs prevail until 4 units are
produced, after which increasing marginal costs are present. As the marginal cost passes from
decreasing to increasing, it arrives at a minimum point at which it is constant.

11.
a.
(1) TC = 20 + 4Q
Quantity
0
1
2
3
4
5
6
7
8
9
10
Total
Fixed
Cost
20
20
20
20
20
20
20
20
20
20
20
Total
Variable
Cost
0.00
4.00
8.00
12.00
16.00
20.00
24.00
28.00
32.00
36.00
40.00
Total
Cost
20.00
24.00
28.00
32.00
36.00
40.00
44.00
48.00
52.00
56.00
60.00
Average
Fixed
Cost
Average
Variable
Cost
Average
Total
Cost
Marginal
Cost
20.00
10.00
6.67
5.00
4.00
3.33
2.86
2.50
2.22
2.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
24.00
14.00
10.67
9.00
8.00
7.33
6.86
6.50
6.22
6.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
(2) TC = 20 + 2Q + .5Q2
Quantity
0
1
2
3
4
5
6
7
8
9
10
Total
Fixed
Cost
20
20
20
20
20
20
20
20
20
20
20
Total
Variable
Cost
0.00
2.50
6.00
10.50
16.00
22.50
30.00
38.50
48.00
58.50
70.00
Total
Cost
20.00
22.50
26.00
30.50
36.00
42.50
50.00
58.50
68.00
78.50
90.00
Average
Fixed
Cost
Average
Variable
Cost
Average
Total
Cost
Marginal
Cost
20.00
10.00
6.67
5.00
4.00
3.33
2.86
2.50
2.22
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
22.50
13.00
10.17
9.00
8.50
8.33
8.36
8.50
8.72
9.00
2.50
3.50
4.50
5.50
6.50
7.50
8.50
9.50
10.50
11.50
(3) TC = 20 + 4Q -.1Q2
Quantity
0
1
2
3
4
5
6
7
8
9
Total
Fixed
Cost
20
20
20
20
20
20
20
20
20
20
Total
Variable
Cost
0.00
3.90
7.60
11.10
14.40
17.50
20.40
23.10
25.60
27.90
Total
Cost
20.00
23.90
27.60
31.10
34.40
37.50
40.40
43.10
45.60
47.90
Average
Fixed
Cost
Average
Variable
Cost
Average
Total
Cost
Marginal
Cost
20.00
10.00
6.67
5.00
4.00
3.33
2.86
2.50
2.22
3.90
3.80
3.70
3.60
3.50
3.40
3.30
3.20
3.10
23.90
13.80
10.37
8.60
7.50
6.73
6.16
5.70
5.32
3.90
3.70
3.50
3.30
3.10
2.90
2.70
2.50
2.30
58
59

10
20
30.00
50.00
2.00
3.00
5.00
b.
60
50
40
Total Cost
30
Fixed Cost
20
10
0
0
10
Figure 7.8
24
20
16
AVC = MC
12
Av Cost
4
0
0
10
Figure 7.9
100
80
60
Fixed Cost
Total Cost
40
20
0
0
10
Figure 7.10
2.10
25
20
15
Av Var Cost
Av Cost
Marg Cost
10
0
0
10
Figure 7.11
50
40
30
Total Cost
Fixed Cost
20
10
0
0
10
Figure 7.12
25
20
15
Av Var Cost
Av Cost
Marg Cost
10
0
0
10
Figure 7.13
60
61

c.We have assumed that the first term on the right side of the equation (20) represents fixed costs.
Cost function (1) is a straight line function. There are no increasing marginal costs. Marginal
cost and average variable costs are constant and equal to each other.
Cost function (2) exhibits increasing marginal costs, and the total cost increases at an increasing
rate.
Cost function (3) shows a total cost curve which increases at a decreasing rate. Marginal cost and
average costs decrease throughout the range.
12.
a. Variable costs:
Paper stock
Printing
Binding
Shipping
8000
50000
22000
10000
Total
Total per unit (/10000)
Royalty per unit
Commission per unit
90000
9.00
0.13
0.03
48
48
Variable cost per unit

Fixed costs:
Typesetting
Art
Editing
Reviews
Promotion and advertising
16.68
15000
9000
20000
3000
12000
Total fixed cost

Quantity
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Fixed
Cost
59000
59000
59000
59000
59000
59000
59000
59000
59000
59000
59000
6.24
1.44
59000
Variable
Cost
0
33360
66720
100080
133440
166800
200160
233520
266880
300240
333600
Total
Cost
59000
92360
125720
159080
192440
225800
259160
292520
325880
359240
392600
Average
Total
Cost
Average
Variable
Cost
Margina
l Cost
46.18
31.43
26.51
24.06
22.58
21.60
20.89
20.37
19.96
19.63
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68
16.68

Total Cost = 59000 + 16.68Q
Average Total Cost = 59000/Q + 16.68
Average Variable Cost = 16.68
Marginal Cost = 16.68
$ (thousands)
420
400
380
360
340
320
300
280
260
Total Cost
240
220
200
180
160
140
120
100
80
60
0
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Figure 7.14
$ (thousands)
48
46
44
42
40
38
36
34
Av Total Cost
32
Av Var Cost
30
Marg Cost
28
26
24
22
20
18
16
0
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Figure 7.15
62
63
13.

a.
Quantity
Average
Total
Cost
Total
Cost
170.0
193.5
220.0
249.5
282.0
317.5
356.0
397.5
442.0
489.5
540.0
593.5
650.0
709.5
772.0
837.5
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Average
Variable
Cost
193.50
110.00
83.17
70.50
63.50
59.33
56.79
55.25
54.39
54.00
53.95
54.17
54.58
55.14
55.83
Margina
l Cost
23.50
25.00
26.50
28.00
29.50
31.00
32.50
34.00
35.50
37.00
38.50
40.00
41.50
43.00
44.50
23.50
26.50
29.50
32.50
35.50
38.50
41.50
44.50
47.50
50.50
53.50
56.50
59.50
62.50
65.50
b.
900
800
700
600
500
Total Cost
400
300
200
100
0
0
10
11
12
13
14
15
Figure 7.16
64
$
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
0
Av Total Cost
Av Var Cost
Marg Cost
10
11
12
13
14
15
Figure 7.17
c.Big Horns cost curves do not include decreasing and constant marginal costs. As can be seen
from above graphs, the marginal cost curve rises from the first unit produced.

Solution of Problems - Cost Analysis

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Solution of Problems (Theory and estimation of cost)

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Theory and Estimation of Cost

Average Var Cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Theory and Estimation of Cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Theory and Estimation of Cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Theory and Estimation of Cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Theory and Estimation of Cost

Variable cost per unit

Total fixed cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Theory and Estimation of Cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Theory and Estimation of Cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Theory and Estimation of Cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

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