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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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