Economics 201 Microeconomics
Tutorial 6
Question 1:
Consider the following cost information for a firm. The table shows the information for the total cost corresponding to different levels of output. Fill in the rest of the columns.
Q Total Total Fixed Total Variable Marginal Average Fixed Average Variable Average
Cost Cost (TFC) Cost (TVC) Cost (MC) Cost (AFC) Cost (AVC) Cost (AC)
0 10
1 14
2 17
3 19
4 25
5 34
6 45
7 60
8 78
9 100
10 130
Question 2:
(a) Suppose a firm’s total cost is given by C(q) = 192 + 12Q^2, where Q refers to quantity. C(Q) simply means that cost is a function of quantity Q. Derive an expression for Average Cost (AC) and Marginal Cost (MC) in terms of quantity (Q).
(b) Consider Cost function C = 100 + 10Q. What is fixed cost? What is the expression for average cost? What is the expression for marginal cost?
Question 3:
Consider a firm in a perfectly competitive market. This firm’s total cost function is given by C(q) = 200 + 10q2. Suppose the current market price is $120. (i) What output should this firm produce? How much profit does it make when it produces this level of output? (ii) Suppose the entry of other firms in the market lead to a decrease in the market price. At what price would be firm break even? (iii) Suppose the firm finds that the market price has dropped to $80. Should this firm stay in business or should it leave the market?
Question 4:
Consider a firm in a perfectly competitive market. This firm’s total cost function is given by C(q) = 192 + 12q^2. What is the minimum possible price in this market for the firm to make an economic profit?
Question 5:
What is the difference between fixed cost, sunk cost and variable costs?