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Solution Library
Calculate the Functional Form of Average Variable Cost
Question
Precision Engineering department has collected data on its average costs of production for the past 12 months. The monthly fixed cost is $4000 per month. The AVC and associated output data are presented below:
| Month | Q | AVC $ |
| Jan | 70 | 375 |
| Feb | 58 | 540 |
| Mar | 160 | 450 |
| Apr | 120 | 255 |
| May | 130 | 138 |
| Jun | 120 | 150 |
| Jul | 10 | 450 |
| Aug | 35 | 350 |
| Sep | 80 | 60 |
| Oct | 110 | 70 |
| Nov | 100 | 90 |
| Dec | 190 | 153 |
Precision Engineering is a perfectly competitive firm. Based on the information above, explain if AVC suggests the functional form: AVC = a + bQ + cQ2. (Draw a scatter diagram of AVC on Y axis and Q on X axis. Fit the scatter diagram with a 2nd degree polynomial trend line.)
Summary
The question belongs to Statistics and it is about calculating whether or not the AVC or the Average Variable Cost of the firm is in a functional form: AVC = a + bQ + cQ2 and plot the same on a graph.
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