The output and cost of production of rice (in bags) are presented in the table below. Use the information in the table to answer the questions that follow. ...
Question 1 Report
The output and cost of production of rice (in bags) are presented in the table below. Use the information in the table to answer the questions that follow.
| Output of rice (in bags) | 0 | 1 | 2 | 3 | 4 |
| Total Variables Coat (TVC) $ | 0 | 5 | 7 | 10 | 20 |
| Total Cost (TC) $ | 7 | 12 | 14 | 17 | 27 |
(a) Calculate the
(i) Average Fixed Cost (AFC) at output levels 0,2 and 4
(ii) Marginal Cost (MC) at all levels of output
(b) If the price of a bag of rice were $10,
(i) calculate the profit/loss at all levels of output.
(ii) at what output level(s) is the maximum profit made?
(c) Draw the marginal cost curve (the use of graph sheet is essential).
Answer Details
(a)(i) Average Fixed Cost (AFC)
Fixed cost = Total Cost − Total Variable Cost. At every output level, fixed cost = $7.
| Output, Q (bags) | Fixed Cost ($) | AFC = FC/Q ($) |
|---|---|---|
| 0 | 7 | Undefined |
| 2 | 7 | 7/2 = 3.50 |
| 4 | 7 | 7/4 = 1.75 |
(a)(ii) Marginal Cost (MC)
Using successive changes in total cost:
| Output (bags) | MC ($) |
|---|---|
| 0 | 7 |
| 1 | 12 − 7 = 5 |
| 2 | 14 − 12 = 2 |
| 3 | 17 − 14 = 3 |
| 4 | 27 − 17 = 10 |
(b)(i) Profit or loss when price = $10 per bag
\(TR = P \times Q = 10Q\), while \(\text{Profit} = TR - TC\).
| Output (bags) | TR ($) | TC ($) | Profit/Loss ($) |
|---|---|---|---|
| 0 | 0 | 7 | −7 (loss) |
| 1 | 10 | 12 | −2 (loss) |
| 2 | 20 | 14 | 6 (profit) |
| 3 | 30 | 17 | 13 (profit) |
| 4 | 40 | 27 | 13 (profit) |
(b)(ii) Maximum profit of $13 is made at output levels of 3 bags and 4 bags.
(c) Marginal Cost Curve
The MC curve is obtained by plotting the points \((0,7), (1,5), (2,2), (3,3)\) and \((4,10)\), and joining successive points.
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