Widgets R Us currently has a fixed amount of capital, which costs the firm $1,000. Since...

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Widgets R Us currently has a fixed amount of capital, which costs the firm $1,000. Since this capital cannot be changed at wi

business economics

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Answer 1

Answer #1

ANSWER:- currect answer is option (4)

Average total costs are rising because marginal cost is above the average total costs

Explanation:-

Each worker is paid $150.

Calculate the total cost when 6 workers are hired -

Total cost = Fixed cost + Variable cost

= $1,000 + ($150 * 6)

= $1,000 + $900

= $1,900

Output produced when 6 workers are hired = 150 widgets

Calculate the total cost when 7 workers are hired -

Total cost = Fixed cost + Variable cost

= $1,000 + ($150 * 7)

= $1,000 + $1,050

= $2,050

Output produced when 7 workers are hired = 160 widgets

Change in total cost = $2,050 - $1,900 =150

Change in Total costs = $150

Change in output = 160 - 150 = 10

Change in output= $10

Average marginal cost = Change in total cost/Change in output

= 150/10 = $15

The average marginal cost when the firm decides to hire 7 workers instead of 6 is $15.

Calculate average total cost when the firm employes 7 workers -

Average total cost = Total cost when 7 workers are hired/Total output produced by 7 workers

Average total cost = $2,050/160

= $12.81

The average total cost when the firm employs 7 workers is $12.81.

At the level of output with 7 workers, MC is greater than AC. In such scenario, average total cost rises.

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