Directions: Answer the questions based on the following information:
ABC Ltd. Produces widgets for which the demand is unlimited and they can sell all of their production. The graph below describes the monthly variable costs incurred by the company as a function of the quantity produced. In addition, operating the plant for one shift results in a fixed monthly cost of Rs. 800. Fixed monthly costs for second shift operation are estimated at Rs. 1200. Each shift operation provides capacity for producing 30 widgets per month.

Note: Average unit cost, AC = Total monthly cost / monthly production, and Marginal cost, MC is the rate of change in total cost for unit change in quantity produced.

What is the correct answer?


From the data provided it can be inferred that, for production levels in the range of 0 to 60 units,

A. MC in an increasing function of producing quantity.

B. MC is a decreasing function of production quantity.

C. Initially MC is a decreasing function of production quantity, attains a minimum and then it is an increasing function of production quantity.

D. None of the above

Correct Answer :

D. None of the above

To find the trend we will find the MC in different interval of production
MC between 1 to 6 units = (1100 850)/5 = 50
MC between 16 to 21 units = (2300 1800)/5 = 100
MC between 26 to 30 units = ( 3150 2700)/4 =112.5
MC between 30 to 31 units = (4500 3150)/1 = 1350
MC between 31 to 36 units = (500 4500) /5 = 100
As can be seen the MC is an increasing function for a period and then it is a decreasing function hence none of the above given statements is true.

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