Engineering Economics

Assignment 1

Submitted by :ABDUL HASEEB

Reg No: FA15-BCV-8A-029

1. Explain each cost curve shown in above figure

Average fixed cost: It is define as total fixed cost divided by number of units of output
manufactured. AFC decreased as quantity of product is increases because same amount of fixed
cost is being divided into large number of output. AFC will never be zero.

Average variable cost :It is defined as total variable cost divided by number of units of outputs
manufactured. In start AVC first decreases reaches to minimum value and then start increasing
again due law of variable proration.
Average total cost :It is sum of AVC and AFC. It is total cost per unit of output. Pattern of
ATC depends on AVC and AFC . In start AVC and AFC decreases ,therefore ATC curves also
decreases. As output increases AVC also increases ,AVC > AFC and hence ATC increases.

Marginal Cost: It is define as addition made to total cost by manufacturing of additional unit of
output. Marginal product first increases ,reaches maximum and then start decreasing thus
marginal cost first decreases ,reaches minimum and then start increasing.

2. Explain the relationship between AVC &ATC and MC&AVC

Relationship between AVC and ATC: AVC will always be lie below the ATC curve as ATC
is sum of AVC and ATC. ATC start relatively high than AVC as in start ATC is dominated by
fixed cost in start.

Relationship between MC and AVC : When MC is below AVC ,MC is drawing AC down. AC
fall because MC is cost of next unit produced. When MC is above AVC It is drawing AVC
above because when marginal unit costs more than average ,the average has to increase.

3.How firm will determine efficient level of production based on above cost behavior?

Firm will determine the efficient level of production when marginal cost(MC) and ATC both are
increasing. Shaded region in graph is showing efficient level of production.