Cost theory - numerical
Question 1
Given the following table of costs:
| Output | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Total cost | 50 | 80 | 100 | 150 | 250 | 750 |
Calculate the following:
(i) Fixed cost
(ii) Average cost of production
(iii) Variable cost per unit
(iv) Marginal cost
Plot all the cost curves on a single graph, and determine where diminishing returns sets in.
Question 2
A firm manufactures cars at its plant in Swindon. At a capacity of 100 cars per week it knows that it has an assembly cost of £5,000 per car. It needs to expand production and does a series of design and cost exercises. The results are summarised below.
| Output (cars per week) | 200 | 400 | 600 | 800 | 1,000 | 1,200 | 1,400 | 1,600 |
|---|---|---|---|---|---|---|---|---|
| Assembly cost (£ per car) | 3,000 | 2,500 | 2,300 | 2,200 | 2,000 | 2,400 | 2,800 | 4,000 |
(i) Plot the cost curve for the possible factory extensions.
(ii) Is this a short run or long run cost curve?
(iii) Explain why this curve is U shaped.
