Question

Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when the firm hires 2 workers, the total cost of production is $2,000. When the firm hires a total of3 workers, the total cost of production is $2,500. In addition, assume that the variable cost per unit of labor is the same regardless of the number of units of labor that are hired. What is the firm's fixed cost?

A.$800B.$2,000C.$1,600D.$1,200E.$1,000

Connie’s Car Wash has average variable costs of $3 and average fixed costs of $4 when it produces 800 units of output (car washes). If the firm produces 800 units, then the firm's total cost is

A.$0 B.$800 C.$2,400. D.$3,200. E.$5,600.

Which of the following expressions is (are) correct?(x)marginal cost = (change in quantity of output)divided by (change in total cost)(y)average total cost = total cost divided by quantity of output(z)average total cost = average fixed cost + average variable cost

A.(x), (y) and (z)B. (x) and (y) only C.(x) and (z) only D.(y) and (z) only E.(x) only

Answer 1

Question 1

When 2 workers are hired, total cost is $2,000.

When 3 workers are hired, total cost is $2,500.

So, employment of third worker has increased the total cost by $500.

Thus, the cost of third worker is $500.

It is given that cost of labor remains same. So, cost of each unit of labor is same.

Labor is a variable unit.

So, when 3 labors are hired, variable cost will be (500 * 3) $1,500.

Fixed cost = Total cost - Variable cost

Fixed cost = $2,500 - $1,500 = $1,000

So,

The firm's fixed cost is $1,000.

Hence, the correct answer is the option (E).

Question 2

Average variable cost = $3

Average fixed cost = $4

Calculate the average total cost -

Average total cost = Average variable cost + Average fixed cost

Average total cost = $3 + $4 = $7

The average total cost is $7.

Units produced = 800 units

Calculate the total cost -

Total cost = ATC * Units produced

Total cost = $7 * 800 = $5,600

Thus,

The firm's total cost is $5,600.

Hence, the correct answer is the option (E).

Question 3

Marginal cost is calculated as follows -

Marginal cost = Change in total cost/Change in quantity

Average total cost is calculated as follows -

Average total cost = Total cost/Quantity produced

Average total can also be calculated as follows -

Average total cost = Average fixed cost + Average variable cost

So,

Expression y and z are correct.

Hence, the correct answer is the option (D).