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The Functional Form of the Total Cost Function
$ MC=dTC/dQ ATC =TC/Q AVC= TVC/Q
Marginal, average total, average variable, and average fixed cost curves.
AFC=TFC/Q
FIGURE 6.2
0
Q1
Q 3 Q2
Q
and group health insurance, amounted to $5,000. David’s monthly variable costs, including wages and salaries, telecommunications services (telephone, fax, e-mail, conference calling, etc.), personal computer rentals and maintenance, mainframe computer time sharing, and office supplies, amounted to $20,000. a. Assuming that David does not pay himself a salary, what are the total monthly explicit costs of Computer Compatriots? b. What are the firm’s total monthly economic costs? Solution a. Total explicit cost refers to all “out-of-pocket” expenses. The total monthly explicit costs of Computer Compatriots are TCexplicit = TFC + TVCexplicit = $5, 000 + $20, 000 = $25, 000 b. “Total economic cost” is the sum of total explicit costs and total implicit costs. In this case, the total monthly implicit (opportunity) cost to David Ricardo of founding Computer Compatriots is $10,000, which was the monthly salary earned by him while working for IMC. The new firm’s total monthly economic costs are TCeconomic = TFC + TVCexplicit + TVC implicit = $5, 000 + $20, 000 +
$120, 000 = $35, 000 12
THE FUNCTIONAL FORM OF THE TOTAL COST FUNCTION Figure 6.1 illustrated a short-run total cost function exhibiting both increasing and diminishing marginal product. In the diagram, increasing
