There is a ......... relationship between total production cost and total cost.
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Answer:
Once we know a firm’s production behavior, and we know what each factor of production costs, we can derive the firm’s total, average, and marginal costs. Below we have copied the firm’s production behavior from the first table in the previous section
Let’s assume that the three factors of production used to produce the products in the table are workers, land, and machines. The cost of these factors of production are as follows:
1. Each worker costs the firm $4,000 per month.
2. Each acre of land costs the firm $1,000 per month.
3. Each machine costs the firm $600 per month.
Total monthly worker cost is the number of workers times the cost per worker. For example, at 3 workers, the total worker cost is 3 times $4,000, which equals $12,000.
Total monthly land cost is the number of acres used times the cost per acre. The firm uses 2 acres, so the total monthly land cost is 2 times $1,000, which equals $2,000. This cost is fixed in the short run, regardless of the number of workers employed and the number of products produced.
Total monthly machine cost is the number of machines times the cost per machine. The firm uses 5 machines, so the total monthly machine cost is 5 times $600, which equals $3,000. This cost is fixed in the short run, regardless of the number of workers used and the number of products produced.
Total monthly cost of all factors of production is the sum of the three factor costs. For example, at 3 workers, the total cost is $12,000 plus $2,000 plus $3,000, which equals $17,000.
Average monthly cost is the total monthly cost per car. For example, at 3 workers, total production is 15 cars. Total monthly cost is $17,000. Therefore, the average cost is $17,000 divided by 15, which equals $1,133 (rounded to whole dollars).
Marginal monthly cost is the additional cost per car. For example, at 3 workers, the total cost increases by $4,000 compared to what it is at 2 workers. Total production increases by 8 products (from 7 to 15). Therefore, marginal cost is $4,000 divided by 8, which equals $500.
The next unit (Unit 5) elaborates on the various cost functions, discusses the difference between implicit and explicit costs, illustrates graphs of these functions, and discusses long-run cost behavior.
Explanation:
Answer:
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Explanation:
Relationship Between Average and Marginal Cost
When the average cost increases, the marginal cost is greater than the average cost. When the average cost stays the same (is at a minimum or maximum), the marginal cost equals the average cost.