Calculating economic profit

Chapter 8: Production Costs: Where Less Is More

As I indicate in the earlier sections, “Marginal cost” and “Determining Average Costs,” the total cost function

results in the following functions for marginal cost (MC), average variable cost (AVC), and average total cost (ATC)

To minimize each of these costs, you simply take the derivative of the function and set it equal to zero.

For marginal cost, follow these steps:

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1. Take the derivative of marginal cost with respect to quantity.

2. Set the derivative equal to zero and solve for q.

The quantity of output that minimizes marginal cost is 4. This is also the quantity of output at which diminishing returns begin.

Use a similar process to minimize average variable cost:

1. Take the derivative of average variable cost with respect to quantity.

2. Set the derivative equal to zero and solve for q.

Average variable cost is minimized at 6 units of output.

Finally, to minimize average total cost, follow these steps:

1. Take the derivative of average total cost with respect to quantity.