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Assignment Case

Essay by   •  May 13, 2012  •  Research Paper  •  1,022 Words (5 Pages)  •  1,028 Views

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a)Total fixed cost -cost of production that does NOT change with changes in the quantity of output produced by a firm in the short run. Total fixed cost is one part of total cost. At any and all levels of output, fixed cost is the same. It includes cost that is not dependent on, or is unrelated to, production. The best way to identify fixed cost is to produce zero output. Fixed cost is incurred whether or not any output is produced. A cost measure directly related to total fixed cost is average fixed cost. The total fixed cost curve graphically represents the relation between total fixed cost incurred by a firm in the short-run production of a good or service and the quantity produced. Because total fixed cost is fixed, the total fixed cost curve is a horizontal line.

i) Total fixed cost on output 0 is 40euro as TFC is a FIXED and remains the same at any output.

ii)For output of 3 units Total fixed cost is also 40 euro because as I mentioned before TFC stays the same at any output.

b) Fixed cost per unit of output, found by dividing total fixed cost by the quantity of output. Average fixed cost, usually abbreviated AFC, decreases with larger quantities of output. The logic behind this relationship is relatively simply. Because fixed cost is FIXED and does not change with the quantity of output, a given cost is spread more thinly per unit as quantity increases.

i) Average fixed cost at output of 1 is: AFC=TFC/1, AFC=40/1=40 euro

ii) Average fixed cost at output of 2 is: AFC=TFC/2, AFC=40/2=20 euro

c) Total variable cost -cost of production that does change with changes in the quantity of output produced by a firm in the short run. Variable cost depends on the level of output. If a firm produces more output, then variable cost is greater. If a firm produces no output, then variable cost is zero. The total variable cost curve graphically represents the relation between total variable cost incurred by a firm in the short-run product of a good or service and the quantity produced. Because total variable cost increases with the quantity produced, the total variable cost curve has a positive slope. Total variable cost=Total cost-Total fixed cost.

i) Total variable cost at output 0 : according to the graph TC=40 , so TVC=TC-TFC, TVC=40-40=0euro

ii)Total variable cost at output 3: according to the graph TVC=120, so TVC=TC-TFC, TVC=120-40=80euro

d)Average variable cost- total variable cost per unit of output, found by dividing total variable cost by the quantity of output. When compared with price (per unit revenue), average variable cost (AVC) indicates whether or not a profit-maximizing firm should shut down production in the short run.

i) Average variable cost at output 1 : AVC=TVC/Q, TVC=TC-TFC. TC according to the graph is 70euro, TVC=70-40=30euro, AVC=30/1=30euro

ii)AVC at output 2 : AVC=TVC/Q, TVC=TC-TFC. TC according to the graph is 90euro, TVC=90-40=50euro, AVC=50/2=25 euro

Question 2

a) Total revenue is the total receipts of a firm from the sale of any given quantity of a product.

It can be calculated as the selling price of the firm's product times the quantity sold,

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