ECO601 Business Econometrics GDB Spring 2020 Solution & Discussion Last Date: 06-06-2020
Total Marks 10
Starting Date Tuesday, June 02, 2020
Closing Date Saturday, June 06, 2020
Question Title GDB
Graded Discussion Board
Business Econometrics (ECO601)
In Economics, the change which is observed in the total cost due to the production of one more unit of a product/output is called marginal cost. In most of the industrial production, initially, the marginal cost falls as the volume of production increases because of economies of scale. In the beginning, costs are lower for the reason that there are some discounts on the factors that are engaged in performing different tasks like, bulk purchases of raw materials, efficient use of machinery and specialized labors. However, a point arises in the production process where the marginal cost will start to rise again as a result of diseconomies of scale. At this stage, the cost may rise because of various factors like to spend more money to obtain the sources, buy more equipment, hire more management, and tap out a local source of raw materials.
Now consider the following marginal cost function (MC) where Q is the level of output:
In this given function; a, b and c are coefficients. Now discuss what will be the conditions (signs) of coefficients b and c in order to get the required shape of the marginal cost (MC) curve? If the required condition of coefficients for the MC curve is violated then what will be the shape of the curve?
In a short-run perspective, a firm’s total costs can be divided into fixed costs, which a firm must incur before producing any output, and variable costs, which the firm incurs in the act of producing. Fixed costs are sunk costs; that is, because they are in the past and cannot be altered, they should play no role in economic decisions about future production or pricing. Variable costs typically show diminishing marginal returns, so that the marginal cost of producing higher levels of output rises.
Marginal cost is calculated by taking the change in total cost (or the change in variable cost, which will be the same thing) and dividing it by the change in output, for each possible change in output. Marginal costs are typically rising. A firm can compare marginal cost to the additional revenue it gains from selling another unit to find out whether its marginal unit is adding to profit.
Average total cost is calculated by taking total cost and dividing by total output at each different level of output. Average costs are typically U-shaped on a graph. If a firm’s average cost of production is lower than the market price, a firm will be earning profits.
Average variable cost is calculated by taking variable cost and dividing by the total output at each level of output. Average variable costs are typically U-shaped. If a firm’s average variable cost of production is lower than the market price, then the firm would be earning profits if fixed costs are left out of the picture.