1. Average Cost = Cost / quantity1 2 3 4 5 23 22 20 24 35
AC = C / q q C
AC = C/q 1 20
20/1 = 20 2 22
22/2 = 11 3 23
23/3 = 7.67 4 24
24/4 = 6 5 35
35/5 = 7

2. Average Cost AC = Cost / quantity = Slope of the line from the origin24 22 20 35 q C 1 2 3 4 5 23 q C
AC = C/q 1 2 3 4 5 20 22 23 24 35
m = 20/1 = 20
AC = m = 7
m = 22/2 = 11
AC = m = 7.67
m = 23/3 = 7.67
m = 24/4 = 6
AC = m = 6 Least slope, Least AC
m = 35/5 = 7

3. = Slope of the line from the origin
Average Cost AC = Cost / quantity
= Slope of the line from the origin
Marginal Cost MC = Cost of producing the next item
= Slope of the Tangent line q C
MC > AC
MC < AC
MC < AC
MC = AC
MC < AC
Minimum Average Cost when: MC = AC Slope of the tangent line = Slope of the line from the origin

4. C q MC < AC MC > AC MC = AC Minimum Average Cost
MC < AC Marginal Cost is less than Average Cost
By increasing production, the average cost is reduced
MC > AC Marginal Cost is greater than Average cost By increasing production, the average cost is increased.
As long as marginal Cost MC is less than Average Cost AC, the Average Cost AC continues to get smaller.
Once Marginal Cost MC is more than Average Cost AC, the Average Cost AC starts to go up.

5. Example: If the cost function is C = 2q3 - 6q2 + 7q
a) Find the marginal cost MC:
MC = C ' = 6q2 - 12q + 7
b) Find the average cost AC:
AC = C / q = (2q3 - 6q2 + 7q )/q
= 2q2 - 6q + 7
c) Find the point where AC is minimum:
AC = MC
= 6q2 - 12q + 7
2q2 - 6q + 7
0 = 4q2 - 6q
0 = 2(2q - 3)
q = 0 (not a solution) or
q = 3/2 = 1.5 units

6. d) Find the cost (C) of producing 0.5, 1, 1.5 , 2 , 2.5 and 3 units.
e) Find the Marginal Cost (MC) of producing
0.5th, 1st, 1.5th , 2nd , 2.5th and 3rd unit.
f) Find the Average Cost (AC) of producing , 1, 1.5 , 2 , 2.5 and 3 units. q
C = 2q3 - 6q2 + 7q
MC = 6q2 - 12q + 7
AC = 2q2 - 6q + 7
0.5
2.25 Dollars
2.5 Dollars/unit
4.5 Dollars/unit 1
3 Dollars
1 Dollar/unit
3 Dollar/unit
1.5
3.74 Dollars
2.5 Dollars/unit 2
6 Dollars
7 Dollars/unit
3 Dollars/unit
2.5
11.25 Dollars
14.5 Dollars/unit
4.5 Dollars/unit 3
21 Dollars
25 Dollars/unit
7 Dollars/unit
MC = AC

7. Lowest point for AC or Minimum AC
Marginal Cost MC
Cost C
Average Cost AC
Lowest point for AC or Minimum AC
AC = MC