5 Steps to a 5: AP Microeconomics 2017 by Dodge Eric R

Author:Dodge, Eric R. [Dodge, Eric R.]
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2016-08-05T04:00:00+00:00

The mathematical relationship between total costs and per-unit (or average) costs is rather straightforward: divide the total dollars of cost by the output produced, and you get average dollars spent on a unit of output. These relationships can also be seen in a graph similar to the one in Figure 8.4 , and recent free-response questions have tested these relationships by asking students to use an average-cost graph like the one in Figure 8.5 to identify a total cost concept.

Figure 8.5

Suppose the firm is producing Q0 units of output. How can we determine total cost (TC0 ), total variable cost (TVC0 ), and total fixed cost (TFC0 ) from the information in Figure 8.5 ? Let’s take the relationship between ATC and TC as an example. Remember that average total cost is computed as

ATC0 = TC0 /Q0

so TC0 = ATC0 × Q0 . In Figure 8.5 , TC0 is the area of a rectangle with a width of Q0 units and a height of ATC0 . Using the notation in the graph, this area would be identified by the area 0ATC0 x Q0 . In a similar way, the TVC0 would be identified by the area 0AVC 0 y Q0 , and TFC0 by the area 0AFC0 z Q0 .

If you know the relationships between total and per-unit costs, and you can identify the area in a graph like Figure 8.5 , you are prepared to earn some valuable free-response points.

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