Albert’s Charter Bus Venture (example) Where is the Loss Region? Where is the Profit Region? Where is the Breakeven point? A new machine comes with 100 free service hours over the first year. Additional time costs $75 per hour. What are the average and marginal costs per hour for the following quantities?

Albert plans to charter a bus to take people to see a wrestling match show in Jacksonville. His wealthy uncle will reimburse him for his personal time, so his time cost can be ignored.

Item Cost Item Cost

Bus Rental $80 Ticket $12.50

Gas Expense $75 Refreshments $ 7.50

Other Fuel Costs $20

Bus Driver $50

Total Costs $225.00 Total Costs $20.00

Which of the above are fixed and which are variable costs?

How do we compute Albert’s total cost if he takes n people to Jacksonville?

Albert’s Charter Bus Venture (example)

 

Albert’s Charter Bus Venture (example)

Answer: Total Cost = $225 + $20 n.

Graph of Total Cost Equation:

n

Total cost

 

marginal cost

-The cost to take one more person

average cost

– Average cost: the cost per person

Avg. Cost = TC/n

Avg. Cost = ($225+$20n)/n = $20 + $225/n

For n = 30, TC = $885

Avg. Cost = $885/30 = $29.50