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