Question

Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs.

Short answer

$\mathrm{Average}\mathrm{cost}\left(\mathrm{AC}\right)=\mathrm{Total}\mathrm{cost}\left(\mathrm{TC}\right)/\mathrm{Output}\left(\mathrm{Q}\right)$

$\mathrm{Marginal}\mathrm{cost}\left(\mathrm{MC}\right)=\mathrm{Change}\mathrm{in}\mathrm{TC}/\mathrm{Change}\mathrm{in}\mathrm{Q}$

Step-by-step solution

Step 1: Introduction:

The Average Cost is the cost according to which the unit value of manufacturing is acquired via way of means of dividing the whole value (TC) by the whole output (Q). whereby Marginal Cost is the cost that is incurred for producing an extra or additional unit of the output.

Step 2: Calculating the average cost and Marginal cost:

To calculate the average cost, the formula is as follows:

$\mathrm{Average}\mathrm{cost}\left(\mathrm{AC}\right)=\mathrm{Total}\mathrm{cost}\left(\mathrm{TC}\right)/\mathrm{Out}\mathrm{put}\left(\mathrm{Q}\right)$

Marginal cost can be calculated by using the formula as

$\mathrm{Marginal}\mathrm{cost}\left(\mathrm{MC}\right)=\mathrm{Change}\mathrm{in}\mathrm{TC}/\mathrm{Change}\mathrm{in}\mathrm{Q}$

the relationship between average variable cost (AVC) and marginal cost (MC) is as follows:

(I) When MC is smaller than AVC, AVC will decrease as the output increases.

(ii) When MC is equal to AVC, that is, when the MC curve and the AVC curve intersect at point A, the AVC is constant and at the maximum point.

(iii) When MC is greater than AVC, AVC increases with increasing output.

(iv) After that, both sAVC and MC increase, but MC increases faster than AVC. As a result, the MC curve is steeper than the AVC curve.