Total costs diagrams

Question 1

Draw the TFC curve on the diagram

Answer 1

TFC is constant and therefore will be a straight line

Question 2

Draw the TVC on the diagram

Answer 2

Question 3

Explain the different sections of the Total variable cost curve

Answer 3

Section 1: law of diminishing marginal returns states in the short run, when adding a variable factor of production (labour) to a stock of fixed factors of production, initially total output will rise and then fall. Curve is steep because wages are quite high when hiring workers.

Section 2: here the curve is more flat, output is increasing much more than costs because initially there is under utilised capital and specialisation gains to be made

Section 3: a firm may be increasing workers however we see law of diminishing marginal returns kick in to the addition of those workers. This may be due to an over utilisation of capital and fixed FoP become a constraint on production and therefore leading to workers fall in productivity. Consequently this leads to costs increasing greater than output

Question 4

Draw the total cost curve

Answer 4