subject: MANAGERIAL ECONOMICS

Consider estimation of a short-run average variable cost function of the form AVC = a + bQ + cQ 2

Using time-series data, the estimation procedure produces the following computer output:

DEPENDENT VARIABLE: AVC RSQUARE FRATIO PVALUE ON F

OBSERVATIONS:22 0.8557 56.32 0.0001

VARIABLE PARAMETER ESTIMATE STANDARD ERROR TRATIO / PVALUE

INTERCEPT 75.0 26.5 xxxx / xxxx

Q 0.0120 0.0058 xxxx / xxxx

Q2 0.00006 0.000013 xxxx / xxxx

a) Of the three parameter estimates a , b, and c , test the estimates that are statistically significant at the 5 percent level. [Hint: please refer to Appendix for a t-values table]

b) Calculate the levels of output and average variable cost when the average variable cost reaches its minimum level.

c) What is the estimated marginal cost function?

d) What is the estimated average variable cost function?

e) Calculate marginal cost and average variable cost when output is 6,000 units.