Owen owns a business making coffee mugs He is currently tryi

Owen owns a business making coffee mugs. He is currently trying to figure out his cost structure for the month. Each month, he has to pay $1,000 for rent and machinery. For every mug he produces, it costs him $20 in material and $10 in wages.

a) Which costs are fixed? Which costs are variable? Explain.
(b) What is the total cost function?
(c) Derive the average total cost, average variable cost, and average fixed cost functions.

Solution

Rent and Machinery: $1000

Material : $20 per mug

Wages : $10 per Mug

(a) Fixed Cost are the ones that dont change irrespcetive of the number of units you produce, hence in this case Rent and Machinery is the fixed cost

Variable Cost are the ones which change based on the number of units one produces, hence in this case Variable Cost will be Material and Wages as more the number of mugs produced higher these costs will be.

(b) Total Cost will be Fixed and Variable Cost, let\'s assume \"q\" is the number of mugs Owen will produce so

Total Cost (TC) = Fixed + Variable

TC = 1000 + 20q + 10q

TC = 1000 + 30q

(c) Average Total Cost (ATC) = TC/Quantity

ATC = 1000/q + 30

Average Variable Cost (AVC) = Variable Cost/ Quantity

AVC = 30q/q = 30

Average Fixed Cost (AFC) = FC/Quantity

ATC = 1000/q