Now in our class, we are going to make a simplifying assumption, about a cost, in order to keep the math nice and easy. Fixed cost will, of course be fixed, and I will usually refer to that as just being F; the fixed cost that’s there. Our variable cost, which is going to be some function of the volume index, will be simplified so it is always going to be proportional to the volume index. That constant of proportionality you have right there is alpha, eventually we will give this an interpretation. This will end up giving you our total cost, you see I have a little curly “C” right there, as a function of the volume. What we are doing here is, rather than having some kind of an oddly shaped little cost function, we are actually going to have total cost, be just a simple linear function. Here is the fixed cost which constitutes the intercept right here. Here is the line that we have, it has the slope “alpha” and basically everything that is above the fixed cost…all this stuff right here… is your variable cost. Again the simplifying assumptions will make it so that other items that we intend to create, like average cost, average variable cost, and average fixed cost, will have some kind of peculiar shapes that we don’t usually see out in the wild, but eventually I’ll show you what kinds of shapes that you do see out in the wild.

Transcription Of Simplifying Assumptions Video

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