Question

Refer to the following table. What is the average variable cost of producing three units of the good?

Output	Total Fixed Cost	Total Variable Cost	Total Cost		Average Fixed Cost	Average Variable Cost		Average Total Cost	Marginal Cost
1	—	—	—	—			—	—	—
2	—	—	$600	—			—	—	—
3	—	—	—	—			?????	—	$20
4	—	$440	—	—			—	—	—
5	$500	—	—	—			—	—	—

a.

$20

b.

$80

c.

$420

d.

$120

e.

$140

Refer to the accompanying graph to answer the following questions.

MC ATC AVC Q1 Q2 Q3 Q45 Q

The average total cost (ATC) and average variable cost (AVC) converge as the level of output produced increases because

a.	average total cost decreases as output increases.

b.	the firm is able to drive its competitors out of business by lowering its price.

c.	average fixed cost decreases as output increases.

d.	the firm experiences gains in productivity from employee specialization.

e.	the firm is able to purchase more capital and exploit economies of scale.

In the short run, the cost of ________ is variable, whereas the cost of ________ is fixed.

a.	electricity; wages

b.	capital; raw materials

c.	labor; capital

d.	raw materials; labor

e.	capital; labor

Answer 1

1) Total fixed cost = $500

Total Cost at output is 3 units is = Total Cost when output is 2 + Marginal cost at 3

= $600+$20 = $620

Total Variable cost =Total Cost - Total Fixed Cost

=$620-$500 = $120

Average variable cost = $120/3 = $40

Therefore $40 is the answer.

2) The ATC and AVC converge as the level of output increases the average fixed cost starts decreasing with increasing output which causes ATC to decrease even more when comacomp to AVC and this results in the convergence.

Therefore (c) is the answer

3) Usually labor is a variable cost in short run as the labor is hired on the requirement and the total cost of wages with the amount of labour hired. However the entire short run process usuay runs at a fixed amount of capital.

Therefore (c) labor, capital is the answer