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Consider a situation where a firm that produces compost is trying to figure out how its costs are structured. No matter what, the firm must pay 100,000 per year in licensing fees to the state. On top of that, for every 5,000 units of compost they produce, they require an additional storage bin, which costs the firm 3,000. Lastly, the firm must pay a laborer 2 per unit of compost produced.
(a) Identify which costs are fixed, and which are variable. Explain your reasoning.
(b) For quantities between 6,000 and 8,000 units, what is the total cost function?
(c) From your result in part (b), derive the average total cost, average variable cost and average fixed cost functions.
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