Maximizing total profit with calculus

126 Part II: Considering Which Side You’re On in the Decision-Making Process

PSI powers down

Public Service Company of Indiana started construction of the Marble Hill nuclear power plant near Hanover, Indiana, in 1977. Construction was stopped on three separate occasions during the summer of 1979 to investigate and correct the growing number of reports of poor construction. After spending $2.5 billion in construction costs, PSI halted construction of the power plant in 1984. PSI decided to abandon Marble Hill because it estimated that another $4 billion was required to complete the project. PSI’s decision wasn’t based upon what it had already spent — the $2.5 billion was a sunk cost. Instead, PSI made its decision based upon the $4 billion that was still required to complete the project.

It Is What It Is: Ignoring Sunk Costs

Don’t live in the past. As a decision-maker you need to focus on what can be changed and what can’t be changed. Sunk costs are costs that have already been incurred and can’t be recovered or changed. Because nothing can be done to change sunk costs, they don’t affect decision-making. If you can’t change it, you must ignore it.

Determining Average Costs

Frequently you want to know the cost per unit associated with producing a good, because you can use this information to establish your product’s price and determine your profit per unit. If you want to know cost per unit, average cost is what you need to know.

Average total cost

Average total cost (ATC) is the total cost per unit of output. It’s determined by dividing the total cost equation by the quantity of output. Using the total cost equation

average total cost equals