One of your firm’s suppliers discounts prices for larger quantities. the first 1000 parts are $15 each. the next 1500 are $13 each. all parts in excess of 2500 cost $11 each. what are the average cost and marginal cost per part for the following quantities? (a)650 (b)1250 (c)2500 (d)3500

a) Average cost of producing 650 units will be $15

Marginal cost will also be $15

b) Marginal cost = $13

Average cost = $14.6

c) Marginal cost = $11

Average cost = $13.8

d) Marginal cost = $11

Average cost = $13

Explanation:

Data provided in the question:

Cost of first 1000 parts = $15 each

Cost of next 1500 parts = $13 each

Cost of parts excess in 2500 = $11 each

Now,

Marginal cost  is the additional cost of producing one extra unit of a good

a) 650

Since cost of first 1000 parts in $13 each

Therefore,

as 650 is below 1000 i.e lies in the range of first 1000 units

Average cost of producing 650 units will be $15

Marginal cost will also be $15

b) 1250

the 1251th unit will lie in the range on next 1500 units

Thus,

Marginal cost = $13

Total cost of producing 1250 units

= $15 × 1000 + [(1250 - 1000) × $13]

= $15000 + $3250

= $18,250

Average cost = Total cost ÷ Total units

= $18,250 ÷ 1250

= $14.6

c) 2500

the 2501th unit will lie in the range on excess to 2500 units

Thus,

Marginal cost = $11

Total cost of producing 2500 units

= $15 × 1000 + [(2500 - 1000) × $13]

= $15,000 + $19,500

= $34,500

Average cost = Total cost ÷ Total units

= $34,500 ÷ 2500

= $13.8

(d)3500

the 3501th unit will lie in the range on excess to 2500 units

Thus,

Marginal cost = $11

Total cost of producing 3500 units

= $15 × 1000 + [(2500 - 1000) × $13] + [ ( 3500 - 2500 ) × $11]

= $15,000 + $19,500 + $11,000

= $45,500

Average cost = Total cost ÷ Total units

= $45,500 ÷ 3500

= $13

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