Economics 101 
Spring 2005
Answer Key: Homework #4

1. a. The firm’s fixed cost is $120. 
b. The firm’s minimum-cost output is achieved at the quantity that corresponds to the minimum average total cost (ATC). In this case, the minimum-cost output is 5.
Quantity	TC($)	AFC($)	AVC($)	ATC($)		
0	120	　	MC($)	
　	　		60	
1	180	120	60	180	　	
　	　	　	　	　	20	
2	200	60	40	100	　	
　	　	　	　	　	10	
3	210	40	30	70	　	
　	　	　	　	　	15	
4	225	30	26.25	56.25	　	
　	　	　	　	　	35	
5	260	24	28	52	　	
　	　	　	　	　	70	
6	330	20	35	55	　	
　	　	　	　	　		

c. The MC curve must cut through the ATC and the AVC at their minimum costs. 

MC

ATC

AVC

Cost ($)

Q

5

4

2. 
a. Point C.

b 1) ATC 2.        

 2)  larger, diseconomies of scale.

3. 
a. The fixed cost is 190. 

b. The average cost (AC)= the total cost / Q. When Q=100, the AC is {190+53(100)}/100= 1.9+53=54.9. The average variable cost (AVC) = 53Q/Q=53. 

c. The marginal cost = change in total cost / change in quantity of output. The total cost increases by 53 if the firm increases output by one unit. Thus the marginal cost is 53. 

d. C=45Q+240: The new fixed cost is 190+50=240, and the marginal cost is 45. When Q=0, the total cost is the same as the fixed cost, or C=240. When Q=1, the total cost is the fixed cost plus the marginal cost, or 240+45(1)=285.  Thus the slope of the new cost equation is equal to the marginal cost (=45), and its y-intercept is equal to the fixed cost (=240).