Manual - Cost Theory Exercises

lv{anageriai Economics Cost Theory
CFTAPTER 6
COST THEORY
l. ABC'Pool Services provides tyeekly pc'ol rnaintenance services in the Klang Valley.
ooi\rs 9f firry provide this seMce. The service is sbandardized, eacfr comparry
deans the pool and maintairs the proper level of chemicals in the water. Th;
service is typically sold as a three-rrronth contract The market price for the
thi'ee-month conb-act is RM115. ABC has fixed costs of RM3,SOO.
Using data for the last one year, its toial variable cost functicn is sfn:-icd es:
TvG = 12oe -0.2e' + o.occsi3
Q : Number of pools serviceC for ea.cir three-month conhact
a) Determine the averagie tobl cosQ averdge variairie cust arrd rrrarginai cu:i
functiors.
(3 marks)
b) .At vshat ouQut level does averagc variable cost reach iE minimum value?
(2 marks)
c) What is the value of C.re aver4e variable cost at its rnirrimun point?
i1 mark)
d) Shouid ABC conUnue to opeiat= or shculd it close dovrn? Explzrin',ttri..
i2 niaiks)
ii-crial: 3 nrarks)
(ECO 45s OKT 99)
7. Slarikat Pastijaya has the foirowtng srbal revenue ( TR i and lotal cost ( TC )
functions: _
TR = 1500Q -0.5Q'
rL = 50,000+75Cr2-0.05Q2
Q is the rcte of ou@ut
a ) Determine:
i. Average fixed cost funcion
it. Average variabie cost F:,rction
iii. Marginal cost ftlnction
d) In the short-run, if the market price for the firm's product b Rl'rs, should
the firm continue or stop production? Wfry? ' '
(2 n:e*s)
(fotal:8 Marks)
r(ECO 510; Oct 98)
7. During the current year ITM Boolstore estimates the following accounUng ccst
and demand relation for iG product.
TC = $150Q+90.01Q2
p = $9s0-$0.03e
Where TC is total cosq Q is output and P is average price.

The entrepreneur withdraw $100 000 saving to be used as capibal that n'ou,c
otherwise generate 100,6 rate of interest in fixed deposiL
a) Drive the Boolcstore's total cost function.

(1 : ::,r)
b) Estimate the or.rtput level at which average economic cost wil! b€

minimized.
(3 r,' :. -. -i)
c) Esti mate economic profi t-maxi m izin g ouQut level.

(3::-.- r:
d) If sris market operates in the long run,'fetermine the'l-vpe oi n-i-'"'

struch,re
il : \.j
(ECO 465 March 98)
8. Given the average cost function: -
AC=10O+60-12Q+qz
a
Managerial Economics Cost'Iheory
iv. Average clst function :
v. Marginal revenue function ( 5 marlcs ) I -
b ) Determine the profit maximising output and the tobal amount of profits at
- this level of output.
( 3 marks )
Total:gmarks
>.
(rco 46s APR s9 )
3. A firm sells ouQut for R1430 per unit and has a total cost function:
TC = z0 +16e-12e2 +e3
' a ) Determine the firm's rnarginal proiit function, marginal cost and average
cost function.
( 3 marks )
b ) Determine the output level that mirrinrizes marginal cost.
( 2 ntat'rs )
,c) Briefly discuss the relationship between average cost and marginal cost.
Use appropriate diagram.
( 3 marts )
Total :8 marks
( ECo ssO ARP 99)
4. )OZ manufacturing is operating in a local markel It has a fixed ccnt of 5000. Its
aver?ge variable cost function ( AVC ) has -heen app:'cxineted by :
AVC = 1000 + 3Q ,
a) Derive the firm's total cost function
( 2 marks )
b) Determine the equation for each of tlre fotlorving;:
i. Average fixed cost ( AFC )
ia. Aveage r---l ( AC ) .
iii. Total variable cost ( TVC )
iv. Marginalcost ( MC )
( ?- marts )
c) C-alculate the rate of ouput tlrat will minimize average cost.

(2marks) ..
d ) Ho_w much is the.average cost at this level of output

(inseo on question c)?
( 2 marks )
Total : I marks
( rco 505 APR 99 )
5. a) E:plain the relationship between marginal cost and averdge cost. Shorv
this relationship diagrammatically
In fre initial stages of pro'duction, aveGrge total cost falls dramaticalty.

After a certain production level it rises agaln. Explain this-phenomencn
?'-
ugog the fired aM variable cost concepts.
(a rrarks)
b) Given a tobt cost function of TC=115+0.16Q1+0.OZQz-0.005Q=, catcutate

the following:
-'.
i) Fixed cost
ii) Tobal Variabte Cost
iii) Average TotalCcst
iv) f''iarginal Cost
(4 rnet-.<s)
('fotal : 8 F{arks)
(ECO a65; Oct 1998)
6. Suppose that the manager of a firm operating in a perfect'ly competitive rnai'ket

has estimo-ted the iirm's average variable cost function to be
AVC:10_3e+0.5e2
Where Q ls output. Suppose that total fixed cost OFC) is RM600.
a) What is the conesponding marginal cost (l''iC) function?

(2 m:-'s)
b) At what ou$ut is AVC at ibs minimum?

(2 m::rs)
c) What is the minimum value for AVC?

(2 r'narts)

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lv{anageriai Economics Cost Theory

TvG = 12oe -0.2e' + o.occsi3

Q : Number of pools serviceC for ea.cir three-month conhact

Where TC is total cosq Q is output and P is average price.

a) Drive the Boolcstore's total cost function.

b) Estimate the or.rtput level at which average economic cost wil! b€

c) Esti mate economic profi t-maxi m izin g ouQut level.

d) If sris market operates in the long run,'fetermine the'l-vpe oi n-i-'"'

(ECO 465 March 98)

8. Given the average cost function: -

iv. Average clst function :

v. Marginal revenue function ( 5 marlcs ) I -

c) C-alculate the rate of ouput tlrat will minimize average cost.

d ) Ho_w much is the.average cost at this level of output

In fre initial stages of pro'duction, aveGrge total cost falls dramaticalty.

b) Given a tobt cost function of TC=115+0.16Q1+0.OZQz-0.005Q=, catcutate

6. Suppose that the manager of a firm operating in a perfect'ly competitive rnai'ket

Where Q ls output. Suppose that total fixed cost OFC) is RM600.

a) What is the conesponding marginal cost (l''iC) function?

b) At what ou$ut is AVC at ibs minimum?

c) What is the minimum value for AVC?

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