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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
b. Compare the shapes of these curves and discuss their characteristics. (Particularly
interestingshould be the last cost function, whose shape is often found in engineering cost
studies.)
4. The Central Publishing Company is about to publish its first reference book in managerial
economics. It is now in the process of estimating costs. It expects to produce 10,000 copies
during its first year. The following costs have been estimated to correspond to the expected
copies.

Paper stock $8,000


Typesetting $15,000
Printing $50,000
Art (including graphs) $9,000
Editing $20,000
Reviews $3,000
Promotion and advertising $12,000
Binding $22,000
Shipping $10,000

In addition to the preceding costs, it expects to pay the authors a 13 percent royalty and its
salespeople a 3 percent commission. These percentages will be based on the publisher’s price of
$48 per book. Some of the preceding costs are fixed and others are variable. The average
variable costs are expected to be constant. Although 10,000 copies is the projected volume, the
book could sell anywhere between 0 and 20,000 copies. Using the preceding data,

a. Write equations for total cost, average total cost, average variable cost, and marginal cost.
b. Draw the cost curves for quantities from 0 to 20,000 (in intervals of 2,000).