Question

Average total cost is important to a business because

Multiple Choice

a) It tells the firm what the profit per unit produced is.

b) It always declines as more output is produced.

c) It tells the firm what its fixed costs are.

d) It is an indicator of the production function.

Answer 1

Average total cost is important to a business because -

a) It tells the firm what the profit per unit produced is

Explanation -

Average total cost includes both average fixed cost which falls as the quantity of the ouput produced increases and average variable cost. Here the Average total cost indicates the overall cost of per unit of the quantity produced and thus it can be used as the indicator of the firms profit. As the profit per unit can be calculated using price unit less average cost. Initally average cost of the firm falls and then reaches minimum and then starts rising, it is a U - shaped curve.

a)  It tells the firm what the profit per unit produced is.

Yes, it can tell the profit of the per unit produced

Profit per unit = Price per unit - Average cost per unit

b) It always declines as more output is produced.

No, it initally falls as the output increases and then starts rising as the unit produced incraeses.

c) It tells the firm what its fixed costs are.

No, it tells both the fixed and variable cost together.

d) It is an indicator of the production function

No , it is not indicator of production function rather it is indicator of the profit function.

Thank you.