Blog 4: Average Cost

Hello! My name is Professor Bookter and today I will teach you about the average cost function. Looking at my roster, it seems lots of you are Kogod majors! This lesson will actually be beneficial to you in your business futures (I promise!). You use the average cost function when trying to determine cost per unite of producing a certain quantity. Basically, to find this, you will divide the total cost of a production by the number of units produced.

Let us call the cost of producing a quantity q is C(q). The average cost would be a(q). The number of quantity of items is q.

The equation you will use for finding the average cost is a(q)=C(q)/q.

Be careful not to confuse the average cost with the marginal cost! Both have the same units: dollars per item. Just be an eagle eye!

Let us look at an example.

Hunter (as in the company that sells Hunter rainboots) has a cost function C(q)=.01q^3-.6q^2+13q+1000 (in dollars), where q is the number of pairs of rainboots were produced. If 100 pairs of rainboots are produced, find the average cost per pair of rainboots.

The total cost of producing 100 pairs of rain boots is given by C(100)=.01(100)^3-.6(100)^2+13(100)+1000= $6300.

We find the average cost per pairs by dividing by 100, the number of pairs produced.

Average cost = 6300/100= 63 dollars per pair.

If 100 pairs of Hunter rain boots were produced, the average cost is $63 per case.

This is fairly self-explanatory. Use your notes to do your Think-pair-share. I will be walking around for questions! The sheets are up at the front!