Reference no: EM132617680

1. Suppose a firm has a total cost function given by total costs = TCqq = 110,000 + 100 where is the individual firm's level of production.

a. Does this cost expression have fixed costs? If so, what are they?

b. Does this cost expression have variable costs? If so, what are they?

c. Average cost is defined as total costs divided by the level of production, or AC = TC/q. Some cost structures allow for decreasing average costs as the level of production increases for the firm. For example, a doctor's office that buys a $10,000 X-ray machine will calculate an average cost of $10,000 if it only examines one patient ($10,000/1 = $10,000). However if the doctor's office examines 100 patients then the average cost per patient will be $10,000/100 = $100. This behavior is called economies of scale as it refers to the cost-efficiency of increasing the scale of production, often by spreading higher production levels over fixed costs.

For the current problem, calculate average costs for q = 100, q = 1,000, and q = 10,000. Does this firm's cost structure exhibit economies of scale?