Q2 Assume the ABC Inc.

estimated a short-run average variable cost function for its product as:
2
AVC = a + bQ + cQ , using time-series data for 15 years where Q = number of units of output. The
output obtained from the computer is below:

DEPENDENT VARIABLE: AVC R-SQUARE F-RATIO P-VALUE ON F

OBSERVATIONS: 15 0.4135 4.230 0.0407

PARAMETER STANDARD T-RATIO P-VALUE

VARIABLE ESTIMATE ERROR

INTERCEPT 30.4202 6.4659 4.70 0.0005

Q -0.0799 0.0308 -2.60 0.0232
Q2 0.000088 0.00003 2.7 0.017
2 5 6

a. Are the estimates of a, b, and c have correct signs? Are they statistically significant at 5% level of
significance? (use t-ratios from t-table in your textbook)

According to the output table, a = 30.4202, b = -0.0799, and c = 0.000088.

The AVC equation is then:
AVC = 30.4202 -0.0799Q + 0.000088Q2
This is a convex curve (U-shaped) with a positive intercept. Therefore, the
coefficient estimates have correct signs.

The degrees of freedom (df) = number of observations – number of variables

= 15-3=12
From a t-table, we can find that the two-tailed t-ratio at 5% level of significance
with 12 df is 2.179.
Since the absolute value of the T-ratios of all the estimated coefficients are
greater than 2.179, they are all statistically significant.

b. At what level of output do you estimate the AVC reaches its minimum value?
AVC is minimized if the marginal change in AVC is equal to zero. That is:
dAVC/dQ = -0.0799 + 0.000176Q = 0
solve the equation:
Q = 0.0799 / 0.000176=453.98

c. What is the estimated Marginal curve?

First, the total cost is:
TC = AVC*Q = (30.4202 -0.0799Q + 0.000088Q2)Q
=30.4202Q -0.0799Q2 + 0.000088Q3
Then, the marginal cost is the derivative of TC with respect to Q:
MC = dTC/dQ = 30.4202 -0.1598Q + 0.000264Q2
d. What is the estimated Marginal Cost when output is 700 units?

When Q = 700, marginal cost is:

MC = 30.4202 -0.1598(700) + 0.000264x(700)2 = 47.92

e. What is the estimated AVC curve?

We input the estimated coefficients of a, b, and c into the AVC equation, the curve is
then:
AVC = 30.4202 -0.0799Q + 0.000088Q2

f. What is the estimated AVC when output is 700 units?

When Q = 700, AVC is:

AVC = 30.4202 -0.0799(700) + 0.000088 (700)2 = 17.61