Activity 26

Costs of the individual firm
Activity 26
M. I. Fortunate?
• No!
• Your true economic profit from going into
business for yourself is $-3,000. , and this is a
return of -3%.
• The foregone salary of $50,000 and the
foregone interest income of $8,000 are
opportunity costs, so going into business for
herself, cost IM $3,000.
• She might not view this as a loss if she places a
dollar value on the “psychic income or
benefit” of working for herself rather than the
corporation
Aggregate and Unit Cost structure
Aggregate Cost Data Unit Cost Data
Output Total Total Total Marginal Average Average Average

Fixed Variable Cost Cost Fixed Variable Total
Cost Cost (▲TC/ ▲Q) Cost Cost Cost
0 $500 $0 $500
100 500 700 1,200 $7.00 $5.00 $7.00 $12.00
200 500 1,300 6.00 2.50 6.50 9.00
300 500 2,300 5.00 1.67 6.00
400 500 2,400 6.00 1.25 6.00 7.25
500 500 3,100 3,600 7.00 1.00 6.20
600 500 4,320 7.20 0.83 6.37 7.20
700 500 7,400 5,200 0.71 6.71 7.42
Aggregate and Unit Cost structure
Aggregate Cost Data Unit Cost Data
Output Total Total Total Marginal Average Average Average

Fixed Variable Cost Cost Fixed Variable Total
Cost Cost (▲TC/ ▲Q) Cost Cost Cost
0 $500 $0 $500
100 500 700 1,200 $7.00 $5.00 $7.00 $12.00
200 500 1,300 1,800 6.00 2.50 6.50 9.00
300 500 1,800 2,300 5.00 1.67 6.00 7.67
400 500 2,400 2,900 6.00 1.25 6.00 7.25
500 500 3,100 3,600 7.00 1.00 6.20 7.20
600 500 3,820 4,320 7.20 0.83 6.37 7.20
700 500 7,400 5,200 8.80 0.71 6.71 7.42
$6,000
$5,500
AGGREGATE COST DATA
$5,000
$4,500
$4,000
$3,500
$3,000
COST
$2,500
AGGREGATE
$2,000
$1,500
$1,000
$500
$100 $200 $300 $400 $500 $600 $700

QUANTITY OF OUTPUT
$6,000
$5,500
AGGREGATE COST DATA
TC
$5,000
VC
$4,500
$4,000
$3,500
$3,000
COST
$2,500
AGGREGATE
$2,000
$1,500
$1,000
$500 FC
$100 $200 $300 $400 $500 $600 $700

QUANTITY OF OUTPUT
4. How is Marginal Cost
represented in the
Aggregate Cost Graph?
4. How is Marginal cost represented in the
Aggregate Cost Graph?
• It is the slope of the

Total Cost curve
–Move up $700, move
over 100
–The rise over the run
$12
$11 UNIT COST DATA
$10
NOTE: Marginal Cost is plotted
between output levels
$9
MC
$8
ATC
$7
AVC
$6
UNIT COST ($ PE R UNIT)
$5
$4
$3
$2
$1
AFC
100 200 300 400 500 600 700
QUANTITY OF OUTPUT
5. On the graph of Unit
Cost Data, where is Total
Cost per Unit (or Average
Total Cost, ATC) at its
minimum level of output?
5. On the graph of Unit Cost Data, where is Total
Cost per Unit (or Average Total Cost, ATC) at its
• From, or between 500

to 600 units of output
Cost Data,
where is Variable Cost
per Unit (or Average
Variable Cost, AVC) at its
6. On the graph of Unit Cost Data, where is Variable Cost
per Unit (or Average Variable Cost, AVC) at its minimum
level of output?
• From or between 300

and 400 units of output
7. On the graph of Unit Cost
Data,
what is the relationship
between Marginal Cost (MC)
and Average Total Cost
(ATC), when Average Total
Cost is at its minimum level of
output?
7. On the graph of Unit Cost Data, what is the
relationship between Marginal Cost (MC) and
Average Total Cost (ATC), when Average Total
Cost is at its minimum level of output?
• They are equal

8. On the graph of Unit Cost
Data,
what is the relationship
between Marginal Cost (MC)
and Average Variable Cost
(AVC), when Average
Variable Cost is at its
8. On the graph of Unit Cost Data, what is the
relationship between Marginal Cost (MC) and
Average Variable Cost (AVC), when Average
Variable Cost is at its minimum level of output?
• They are equal

9. Explain why marginal
cost, on a unit-cost graph,
meets average total cost
and average variable cost
at their minimum points?
9. Explain why marginal cost, on a unit-cost graph, meets average total cost and average
variable cost at their minimum points?
• By definition
• If ATC (TC/Q) and AVC (VC/Q) fall when MC (▲TC/ ▲Q)
is below them, as they must and
• If ATC (TC/Q) and AVC (VC/Q) rise when MC (▲TC/
▲Q) is above them, as they must
• ERGO - You have to pass through a minimum when you
stop falling and start rising
• Suppose your quiz average is 4 out of 5.
– If on your next quiz (marginal score) you score 3 out of five, your
average would drop.
– If on the following quiz (marginal score) you score 4 out of 5, your
average would rise – as your marginal score has just passed
through the minimum level of your average score
Cost Data, what does the
vertical distance between
the TC/Q (ATC) curve and
the VC/Q (AVC) curve
represent?
10. On the graph of Unit Cost Data, what does the
vertical distance between the TC/Q (ATC) curve
and the VC/Q (AVC) curve represent?
• FC/Q or Average Fixed

Cost (AFC)
11. Explain why fixed
cost has no influence
on marginal cost.
11. Explain why fixed cost has no influence on marginal
cost.
• By definition
• Fixed cost does not change as output
increases
• Marginal cost, by definition, is the change in
total cost as output changes
• ERGO- fixed cost, which does not change,
can have no influence on the changes in cost
measured by marginal cost
– Marginal cost measures the changes in
variable costs as output increases

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Costs of the individual firm

Output Total Total Total Marginal Average Average Average

Output Total Total Total Marginal Average Average Average

$100 $200 $300 $400 $500 $600 $700

$100 $200 $300 $400 $500 $600 $700

• It is the slope of the

$11 UNIT COST DATA

• From, or between 500

• From or between 300

• They are equal

• They are equal

• FC/Q or Average Fixed

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