As in all production endeavors, we want to know how much output we can produce with available resources. • 3.1 Complete the cost schedule given below and indicate at what output rate is ATC minimized. • 3.2 Use the cost data to plot the ATC and MC curves on a graph. Rate of output Total cost Marginal cost Average fixed cost Average variable cost Average total cost 0 $1 000 1 1 100 2 1 300 3 1 650 4 2 200 5 3 000

Answer:

            The production is calculated according to demand in the market. There are many costs that help to determine the total cost of the product. Among many costs, one of them is Marginal costs that means from a one-unit change in the production rate the required cost. It is also explaining an increase in the total cost due to increase in one unit of output. And the average total cost related to per-unit cost that covers the fixed and variable cost of the product. The average total cost is helpful in determining the pricing decision because it is the lower limit of the price, and below this level, the business has to face many financial losses related to product. Now we are calculating the marginal cost, average fixed cost, average variable cost, and average total cost.

Ø  The first row is zero units of output, so the whole row is left empty, and from second product unit we have to determine the marginal costs  according to following way:

1100-1000=100, and with the other two units, we have to do the same calculations as 1300-1100=200, and remaining marginal costs of other outputs also determine in the same way.

Ø  For determining the average fixed cost, we divide the fixed cost with the output units as AFC=total fixed cost/total output. Total fixed cost means that the cost may appear before producing the product, so in case of zero output, the AFC is zero, and calculation is going to start from the 1 output unit.

Ø  For measuring the average variable cost, the total variable cost divided with the output units at a specific time. So minus the fixed cost from the total cost and then divide the number of output to obtain the average variable cost. Like     AVC= 1100-1000/1= $100

Ø  For calculating the average total cost, there are two different ways are given, like in one method the total cost is divided by the number of output to obtain the actual average total cost and in second method, add the average fixed and variable costs to obtain toe average total cost. For second unit of output the                ATC= 1300/2= $650. And the second method is ATC= 500+150= $650. So by using any one method we can easily calculate the average total cost.

Ø  At output unit of 3 and 4, the ATC is minimum as compared to other units. The ATC at these two levels is the same $550.

Graph of As in all production endeavors:

             Now we are showing the marginal cost and average total cost on the graph and show that at which output unit the marginal cost and average total cost are high and low.

Figure  Shows Marginal Cost of output unit

Figure  shows Average total cost (ATC)

Discussion of As in all production endeavors:

The graph of marginal cost explains that the marginal cost is going to increase with the increase in the output units and the steady upward slop is presented in the graph. The second graph of average total cost explains that at first output the average total cost is high, but with the increase in number of units, the average total cost is moving at balance way and moderate average total cost appear of remaining units.           

Conclusion of As in all production endeavors:

            We can conclude that the calculation of marginal cost, average fixed cost, the average variable cost, and the average total cost is very much important to explain all the terms and conditions and also help to determine the retail price of the product.