Question One
Variable costs are the costs that are directly proportional to the level of output. These costs are low in case of low output and increase with the increase in the quantity of commodity produced (Mankiw G. 2011). For this fishing business, the variable cost elements include the labor costs, the cost of fuel as well as bait, ice and equipment costs. This is because at low output these costs are low and increase gradually with the increase in the quantity produced.
Question Two
The labor cost per unit curve drops until a minimum of $0.17 with 5000 units produced after which the curve rises gradually to $0.63 with 15000units being produced. On the other hand, fuel costs per unit increases gradually with the level of output from $0.05 at 1000 units to $0.09 at 15, 000 units. In contrast, the cost of bait, ice and equipment per unit remains constant throughout various levels of output. The variable cost curve thus assumes a straight-line design.
Question Three
The overall average variable cost curve will slope with a negative gradient up to a minimum level of $0.29 at 6000 units after which the AVC will rise to $0.77 at 15,000 units.
Question Four
As the level of output increases, the average fixed costs decrease from $2.00 at 1000 units to $0.13 at 15,000 units. The fixed costs remain constant irrespective of the output hence the curve resembles a normal demand curve with negative gradient.
Question Five
The average total costs decrease from $2.34 with 1000 units to a minimum of $0.60 at 8000 units of output. The ATC then finally rises gradually with increased level of output to $0.9 with 15,000units produced.
Question Six
Marginal cost refers to the cost incurred in the production of n extra unit of output. It shows the incremental cost associated with the production of extra units (Mankiw G. 2011). The marginal cost curve slopes negatively to a minimum turning point of $0.24 with 4,000 units of output after which it rises gradually to $1.80 with 15,000units of output. Profits are maximized at 4000 units of output when MC = MR and MR curve cuts MC curve from below.
References
Mankiw G. (2011) Principles of Economics.NY: Cengage Learning Publishers
