(a)(i) When output is 0, AFC = 7/0 = 00; When output is 2, AFC = 7/2 = $3.5; When output is 4, AFC = 7/4 = $1.75
(ii) At output 0, marginal cost (MC) = 7 - 0 = $7; At output 1, marginal cost (MC) = 12-7 = $5; At output 2, marginal cost (MC) =14 -12 = $2; At output 3, marginal cost (MC) = 17-14 = $3; At output 4, marginal cost (MC) = 27-17 = $10.
(b) If price were to be $10 per bag,
(i) When output is 0, profit = (TR - TC), TR = $10 x 0 = 0, TC = $7, profit = 0 - 7 = $7.00 loss or - $7.00. When output is 1, TR = $10 x 1 = $10 , TC = $12, profit $10 - 12 = $2 .00 loss or - $2.0. When output is 2, TR = $10 x 2 = $20 , TC = $14, profit = $20 - $14 = $6 .00 profit. When output is 3, TR = $10 x 3 = $30 , TC = $17, profit = $30 - 17 = $13.00. When output is 4, TR = $10 x 4 = $40 , TC = $27, profit = $40 - $27 = $13.00.
(ii) Maximum profit is made when output is 3 bags and 4 bags.
(c) Draw the Marginal cost curve (the use of graph sheet is essential)