M01 broo6651 1e sg c01



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Ch07
Ch03, sol 03, sol 03
per unit produced.
a. What is the firm’s total cost function Average cost
The variable cost of producing an additional unit, marginal cost, is constant at $500, so
500
VC
q

, and
500 500
VC
q
AVC
q
q



. Fixed cost is $5000 and therefore average fixed cost is

5000
AFC
q
. The total cost function is fixed cost plus variable cost or TC  5000 500q. Average total cost is the sum of average variable cost and average fixed cost


5000 500
ATC
q
b. If the firm wanted to minimize the average total cost, would it choose to be very large orb bvery small Explain.
The firm would choose to be very large because average total cost decreases as q is increased. As q becomes extremely large, ATC will equal approximately 500 because the average fixed cost becomes close to zero.
4. Suppose a firm must pay an annual tax, which is a fixed sum, independent of whether it

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