Author Question: For each of the following cost functions, if possible, find minimum AC and minimum AVC. a. TC = ... (Read 94 times)

jhjkgdfhk · **on:** Jul 1, 2018

For each of the following cost functions, if possible, find minimum AC and minimum AVC.

a. TC = 40,000 + 20 Q
b. TC = 1000 + 2Q + 0.1 Q2

Question 2

To reduce moral hazard, a firm may

A) pay workers at a piece rate.
B) offer a year-end bonus if firm profits are up.
C) offer stock options.
D) All of the above.

14vl19 · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

a. Set MC = AC.
20 = (40,000/Q) + 20
In this case, AC is decreasing everywhere, and thus there is no minimum average cost (although it will approach 20).
Set MC = AVC.
20 = 20
Q = 0, and at that point, AVC = 20.
b. Set MC = AC.
2 + 0.2Q = (1000/Q) + 2 + 0.1Q
Q = 100, and at that point, AC = 22.
Set MC = AVC.
2 + 0.2Q = 2 + 0.1Q
Q = 0, and at that point, AVC = 2.

Answer to Question 2

D