Question

A firm is producing 1,000 units of a good and the total cost of production is $4 million. $1

million in costs go to fixed factors like buildings, insurances, and operating licenses. The

remaining $3 million goes to workers and suppliers.

a) Using the numbers provided, calculate the average total cost, the average fixed cost, and

the average variable cost?

b) Explain what is meant by marginal cost?

c) If the marginal cost for the firm of producing 1,000 units is $2,500, what has been

happening to the average variable cost? Has it been increasing, decreasing, or staying the

same?

Answer 1

A.

Average total cost =total cost /quantity

=4 million/1000

=4000

Average variable cost =average variable cost /quantity

=3 million/1000

=3000

Average fixed cost =fixed cost /quantity

=1 million/1000

=1000.

B. Marginal cost is extra cost generated by firm with producing one more extra unit.

It can be calculated with following formula,

MC =change in total cost /change in quantity

C.

Decreasing

Because marginal cost is upward sloping and it intersects the average variable cost at its minimum. So yet it has not touched the minimum AVC, that means AVC is decreasing and MC is increasing.