Cost Functions

Students make heavy going sometimes over those cost functions. Here is an example of how a little information can yield lots of cost data. If you are given the basic info for a firm (black numbers) you can easily compute other info (red numbers):

Quantity    Variable Cost    Total Cost    Marginal Cost    Ave. Variable Cost      Ave. Total Cost

1                   $30                $90                 $30                   $30                           $90

2                    50                 110                  20                     25                             55

If at output level 1, Total Cost is 90 and Variable Cost is 30, then Fixed Cost (those costs unrelated to output) must be 60.

Marginal Cost is the increase in Total Cost associated with a one unit increase in output.

Also, I found a very good explanation of Economies of Scale (link below). This is optional but it might help you understand this somewhat tricky concept.

CLICK HERE

“Original document by Peter Turner licensed CC BY”