Question

1) The following table describes the costs of production for a firm.

Quantity	0	1	2	3	4	5	6
Average Total Cost	-	600	325	240	205	196	200
TVC	0	?	?	220	?	?	?

     

What is the average variable cost at a production level of 4 units?

Group of answer choices

a 185

b 80

c 100

d 320

e None of these answers

2)

Suppose a firm faces the following costs:

Quantity	0	1	2	3	4	5
TFC	400	400	400	400	400	400
TC	400	600	700	850	1100	1400

    

What is the average variable cost at a quantity of 4 units?

Group of answer choices

a 175

b 375

c 275

d 100

Answer 1

1) It is given that at Quantity= 3;

Average Total Cost = 240 and Total Variable cost = 220

Average Total Cost is calculated as :

Total Cost/Quantity

And Total Cost = Average Total cost× Quantity

Thus, at Quantity= 3;

Total Cost = 240 × 3 = 720

Now, We know that Total Cost= Total Variable cost+ Total Fixed cost

Given, At Quantity= 3;

Total Variable cost = 220 and Total cost= 720( as Calculated)

As, Total cost = Total Variable cost+ Total Fixed cost

Thus, 720 = 220 + Total Fixed cost

=> Total Fixed cost = 720 - 220 = 500

As Fixed cost is same at all levels of output/Quantity ; therefore total Fixed cost= 500 for all levels of output.

Now, To Calculate Total Variable cost first Total Cost is to be calculated which is calculated as Average Total cost× Quantity

And Total Fixed cost = 500

And Total Variable cost = Total cost- Total Fixed cost

Therefore at

Q =1,TC = 600×1 = 600,TFC = 500,TVC = 600-500=100

Q=2,TC = 325× 2= 650,TFC =500,TVC= 650-500=150

Q= 3,TC= 240×3 =720,TFC=500,TVC = 720-500= 220

Q= 4,TC =205×4 =820,TFC=500,TVC=820-500=320

Q= 5, TC= 196×5 =980,TFC=500,TVC=980-500=480

Q= 6,TC= 200×6 = 1200,TFC=500,TVC=1200-500= 700

Now, Average variable cost is calculated as Total Variable cost/Quantity.

Thus , At Q= 4;

Average Variable cost= 320/4= 80

Therefore,the correct answer is Option B

2. At Q = 4,

Given , Total cost= 1100

And Total Fixed cost = 400

We know,that

Total cost = Total Variable cost+ Total Fixed cost

=> Total Variable cost= Total cost - Total Fixed cost

So, At Q= 4

Total Variable cost = 1100 - 400 = 700

Also, Average variable cost is calculated as:

Total Variable cost/ Quantity

Therefore, Average variable cost at Q= 4 is:

700/4 = 175

Therefore,the correct answer is Option A.