Question

How do we calculate each of the following:

marginal cost, average total cost, and average variable cost?

Short answer

The average total cost (ATC) of production is calculated by dividing the total cost (TC) of production (summation of the total fixed cost (TFC) and total variable cost (TVC) by the total output (Q) produced.

Average variable cost (AVC) is calculated by dividing TVC by the total output (Q).

The marginal cost of production is calculated by dividing the change in the total cost (TC) of production by the change in the level of output (Q).

Step-by-step solution

Step 1. Average total cost

Average total costs are the average costs of producing any given level of output summing up the average fixed costs and average variable costs of production.

Step 2. Calculation of average total cost

The average total cost (ATC) of production is calculated by dividing the total cost (TC) of production (summation of the total fixed cost (TFC) and total variable cost (TVC) by the total output (Q) produced. That is,

$$\begin{gathered} ATC=\frac{TC}{Q} \\ =\frac{TFC+TVC}{Q} \end{gathered}$$

Step 3. Calculation of average variable cost

Average variable costs (AVC) are obtained from the total variable costs (TVC) of production by dividing TVC by the total output (Q). That is,

$AVC=\frac{TVC}{Q}$

Step 4. Calculation of marginal costs

The marginal cost (MC) is the cost of generating an additional unit of output. The marginal cost of production can be obtained by dividing the change in the total cost (TC) of production by the change in the level of output (Q). That is,

$MC=\frac{∆TC}{∆Q}$