Quiz 9: Applications of Cost Theory


For the cost-output data given, the graph below shows the relationship between operating expenditure per student (cost) and students' average daily attendance (output). img The scatter diagram plots the data given in the table. Smooth curves that appear to provide a good fit to the data are represented by img and img .

Variable costs are the costs that vary with the level of output. In case of charter flight, variable cost would vary with the number of occupied seat, that is, food service with seat-by-seat purchase and JIT delivery at each departure. The number of seats occupied is 120 and the variable cost for 120 passengers is $2,400. Thus, the variable cost of sending one more person aboard a charter flight is img , or img .

a) Significance of variables These variables are tested at the statistically significant level of 5% (0.5). Variable is significant, the img value is larger than 0.025.82; the value 0.025.82 is around 2. All the img values of variable are greater than the 2.00; hence, all values are significant in explaining cause and effect relationship. b) Type of cost-output relation The variable img denotes that there is quadratic cost-output relation. c) Economies and diseconomies scale Cost and output relationship here show that the shape of cost is U shaped, U shape of cost curve denotes that cost decreases up to the certain point and economies of scale ensues. After the certain level of output, economies of scale changes into diseconomies of scale.