You are on page 1of 2

Tutorial- Managerial Economic – Cost Function

1) Based on your knowledge of the definition of the various measures of short-run cost,
complete this table.

Q TC TFC TVC AC AFC AVC MC
0 120
1 265
2 264
3 161
4 85
5 525
6 120
7 97
8 768
9 97
10 127

2) The economist for the Grand Corporation has estimated the company’s cost function, using
time series data, to be

TC = 50 + 16Q - 2Q2 + 0.2Q3
where TC = Total cost
Q = Quantity produced per period

a) Plot this curve for quantities 1 to 10.
b) Calculate the average total cost, average variable cost, and marginal cost for these
quantities, and plot them on another graph.
c) Discuss your results in terms of decreasing, constant, and increasing marginal costs. Does
Grand’s cost function illustrate all these?

3) Discuss the following three cost functions:
TC = 20 + 4Q
TC = 20 + 2Q + 0.5Q2
TC = 20 + 4Q - 0.1Q2

a. Calculate all cost curves:
• Total cost
• Total fixed cost
• Total variable cost
• Average total cost
• Average fixed cost
• Average variable cost
• Marginal cost

. Some of the preceding costs are fixed and others are variable.000 Editing $20. Paper stock $8. Using the preceding data.000 copies during its first year. Draw the cost curves for quantities from 0 to 20. average total cost.000). whose shape is often found in engineering cost studies. It is now in the process of estimating costs.) 4.000 Typesetting $15. Write equations for total cost.000 Shipping $10. The following costs have been estimated to correspond to the expected copies. b. average variable cost. the book could sell anywhere between 0 and 20.000 Binding $22. it expects to pay the authors a 13 percent royalty and its salespeople a 3 percent commission.000 Printing $50. It expects to produce 10.000 In addition to the preceding costs. The average variable costs are expected to be constant.000 Art (including graphs) $9.000 Promotion and advertising $12.b.000 Reviews $3. These percentages will be based on the publisher’s price of $48 per book. a. Compare the shapes of these curves and discuss their characteristics.000 copies is the projected volume.000 copies. The Central Publishing Company is about to publish its first reference book in managerial economics.000 (in intervals of 2. (Particularly interestingshould be the last cost function. and marginal cost. Although 10.