Unit 13: The Costs of Production
The cost curves every firm decision in the rest of the course leans on, and the one point where marginal cost always crosses average cost.
4 topics · 13 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Fixed Costs and Variable Costs
- How it worksHow does total cost split cleanly into a fixed part that doesn't change with output and a variable part that does?
- Worked exampleFind the variable cost of producing 100 loaves if total cost is 500 dollars and fixed cost is 200 dollars.
- Common mistakeWhy doesn't a cost stay fixed forever if you give the firm enough time to change it?
- Going furtherWhat happens to a firm's fixed costs once you extend the time horizon long enough for it to renegotiate its lease and sell its equipment?
Your turn1 of 2
Find the variable cost of producing 129 loaves if total cost is 595 dollars and fixed cost is 290 dollars.Marginal Cost
- How it worksHow does marginal cost measure the extra cost of producing exactly one more unit of output?
- Worked exampleFind the marginal cost of the 11th loaf if total cost at 10 loaves is 80 dollars and total cost at 11 loaves is 89 dollars.
- Common mistakeWhy doesn't marginal cost usually stay the same at every level of output?
Your turn1 of 2
Total cost is 88 dollars at a certain output, and rises to 126 dollars when one more unit is produced. What is the marginal cost of that unit?Average Total Cost and Where Marginal Cost Crosses It
- How it worksHow does marginal cost pull average total cost down when it's below it and pull it up when it's above it, forcing a crossing at the minimum?
- Worked exampleFind the output level where average total cost is minimized given a marginal cost curve that crosses average total cost at 8 units.
- Common mistakeWhy isn't the minimum of the marginal cost curve the same point as the minimum of the average total cost curve?
Your turn1 of 2
Find the output level where average total cost is minimized, given a marginal cost curve that crosses average total cost at 12 units.Economies and Diseconomies of Scale
- How it worksHow does spreading fixed costs and specializing labor drive economies of scale, while coordination problems drive diseconomies?
- Common mistakeWhy doesn't a bigger firm automatically have a lower average cost than a smaller one?
- Going furtherWhat happens to the long-run average cost curve as a firm moves from economies of scale into diseconomies of scale?
Your turn1 of 2
A firm doubles output from 108 to 232 units while average cost falls from 15 dollars to 5 dollars. By what percent did average cost change?