Principles of Microeconomics / Unit 6 MIC 0522 worked example, 60 to 90 seconds
Reading the Cost Family
The idea
Given a table or diagram with marginal cost, average variable cost and average total cost, locate three things. The minimum of average variable cost, which is where marginal cost crosses it from below. The minimum of average total cost, further right, where marginal cost crosses that curve. And the gap between the two averages at any output, which is average fixed cost and shrinks as output grows. Check each reading against the rule: wherever marginal cost is below an average, that average must be falling in the next row.
In practice
Worked example: the bakery's average variable cost per loaf runs three, two forty, two fifty-seven, three and three fifty-three; average total cost runs eight, four forty, four, four twenty-five, four seventy-one; marginal cost between the rows runs three, two, three, six, twelve. Average variable cost bottoms at fifty loaves, where marginal cost was two before it and three after. Average total cost bottoms at seventy loaves, where marginal cost was three before and six after. At seventy loaves the gap between the averages is one forty-three, the fixed cost of one hundred spread over seventy.
Where people slip
With whole-number rows the crossing is bracketed, not hit exactly: marginal cost is below the average on one side of the minimum and above on the other. And the two minima differ; the variable average turns up first, since it carries no fixed cost to spread.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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