ECO601 Business Econometrics Assignment No 01 Spring 2019 Solution & Discussion Due Date: 23-05-2019
In Business, the change in the total cost which has been observed due to production of
one more unit of a product/output is called marginal cost. In most of the manufacturing
endeavors, initially, the marginal cost falls as the volume of output rises because of
economies of scale. In the beginning, costs are lower for the reason that there are some
discounts on bulk purchases of raw materials, efficient use of machinery and specialized
labors are engaged in performing the tasks. However, a point comes in the production
process where the marginal cost will begin to rise again as a result of diseconomies of
scale. At this stage, the cost may rise because of multiple factors like to hire more
management, buy more equipment, to tap out a local source of raw materials or to spend
more money to obtain the sources.
Now consider the following marginal cost function (MC) where Q is the level of output:
Where a, b and c are coefficients. If , and then the marginal cost
function will be as following:
1. Calculate cost minimizing output level and minimized cost by using the
optimization process. Also, confirm that cost is minimized which is produced at
the output level.
2. What will be the conditions (signs) of coefficients b and c in order to get the
required shape of the marginal cost (MC) curve?
3. If the required condition of coefficients for the MC curve is violated then what
will be the shape of the curve?
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