7. A firm has fixed costs of $60 and variable costs as indicated in the table at the bottom of this page. Complete the table and check your calculations by referring to question 4 at the end of Chapter 8. LO3

a. Graph total fixed cost, total variable cost, and total cost.

Explain how the law of diminishing returns influences the shapes of the variable-cost and total-cost curves.

b. Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and their relationships to one another. Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and the ATC curves at their minimum points.

c. Explain how the location of each curve graphed in question 7b would be altered if (1) total fixed cost had been

$100 rather than $60 and (2) total variable cost had been

$10 less at each level of output.

Transcribed Image Text:

Total Product Total Fixed Cost Total Variable Cost Total Average Cost Fixed Cost Average Variable Cost 710 2 $ 0 $ 45 85 345 120 150 185 10 68890 225 7 270 325 390 465 Average Total Cost Marginal Cost