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A furniture company has opened a small plant that builds tables. Jill, the production manager, knows the fixed cost of the plant, F = $78 per day, and includes the cost of the building, tools, and equipment. Variable costs include labor, energy costs, and wood. Jill wants to know the cost function. She conducts an experiment in which she varies the daily production level over a 10-day period and observes the associated daily cost. The daily output levels assigned are 1, 2, 4, 5, 7, 8, 10, 12, 15, and 16. The associated total costs for these output levels are 125, 161, 181, 202, 207, 222, 230, 275, 390, and 535, respectively. Fixed Cost F = $78

Use the Trendline tool in Excel to estimate a cost function by regressing cost on output. Try a linear specification (C = a + bq), a quadratic specification (C = a + bq + dq²), and a cubic specification (C = a + bq + dq² + eq³). (Hint: To obtain quadratic and cubic cost specifications, select the polynomial option from the Trendline menu and set Order at 2 for the quadratic specification and at 3 for the cubic function.)

Generate the corresponding average cost data by dividing the known cost by output for each experimental output level.

What value would you choose to use the Set Intercept option? It would make sense to use the Set Intercept option if the intercept is set at .

Based on the plotted regressions, which specification would you recommend that Jill use? Jill should choose a specification as its R² is the . Use the Trendline tool to estimate an average cost curve.

Determine which specification provides the best estimate of the average cost function. A specification provides the best estimate of the average cost function.

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