Question

Table 1 Measures of Cost for ABC Inc. Widget Factory Quantity Variable Total Costs Costs Fixed Costs of Widgets 3233331 $40 $ $46 2 $ 3 32 $43 3 $ 6 4 $ 8 5 $55 6 $21 MAM $40 2. Refer to Table 1. The average fixed cost of producing five widgets is: a. $2 b. $4 c. $5 d. $8

Answer 1

We must know few basics about various costs :

• Fixed Cost is a cost which stays constant for any level of production even for 0 units of production.
• Variable Cost is a cost which changes due to change in output
• Total Cost is the sum of Fixed Cost and variable cost.
• Average cost is to divide respective costs by the units produced.
• Marginal Cost is the change in the Total Cost.

2. Average fixed cost of producing 5 widgets = Fixed Cost of producing 5 widgets / 5

From the table we can see Fixed cost = $40 which remains constant for any level

So, Fixed cost of producing 5 widgets = $40

So, Average fixed cost = $40/5 = $8

• So, Option d. $8 is correct

3. Average variable cost of producing 4 widgets = Variable Cost of producing 4 widgets / 4

From table we see, Variable Cost at 4 units of widgets = $8

So, Average Variable Cost at 4 widgets = $8/4 = $2

• So, Option a. $2 is correct

4. Marginal Cost of producing fifth widget = Total Cost at 5 widgets - Total Cost at 4 widgets

We know from the table, Total Cost at 5 widgets = $55

But Total Cost at 4 widgets = Fixed Cost + Variable Cost at 4 widgets

So, Total Cost at 4 widgets = $40 + $8 = $48

So, Marginal Cost at fifth widget = $55 - $48 = $7

• So, Option b. $7 is correct

5. Average Total Cost at 2 widgets = Total Cost at 2 widgets/2

As, Total Cost at 2 widgets = $43

So, Average Total Cost at 2 widgets = $43/2 = $21.5

• So, Option d. $21.5 is correct

6. Fixed Cost of producing 5 widgets

As we know Fixed cost for any units of production remains same

As Fixed Cost = $40

So, Fixed Cost at 5 widgets = $40

• So, Option a. $40 is correct