Question

Scenario 14-4 The information below applies to a competitive firm that sells its output for $40 per unit.

Answer 1

Answer:

The magnitude which has the same value after change in units of output from 150 to 151 is Average revenue cost.

Further Explanation:

Competitive market is that market in which there are large number of buyers and sellers selling homogeneous products.

In a competitive market:

Price = Marginal cost = Marginal revenue = Average revenue

The various types of cost and revenue are: -

• Total cost: The cost incurred on production of goods and services. It is sum of total fixed cost and total variable cost.

• Total Fixed cost: The cost which does not change with the change in output. Total fixed cost incurred even when production is zero.

• Total Variable cost: The cost which changes with change in output . It includes cost of raw material and contracted labors.  

• Marginal Cost: The increase in total cost due to increase in one unit of production.

• Average cost: The total cost per unit.

• Average variable cost: The total variable cost per unit.

• Average fixed cost: The total fixed cost per unit. The AFC declines continuously and never touches 0 or turn negative.

• Total revenue: The total money collected by selling the output in the market.

• Marginal revenue: The increase in total revenue due to selling one additional unit in the market.

• Average revenue: The total revenue per unit.

The given information is as follows: -

• Price = $40

• Average total cost when firm produces 150 units = $24.50

• Average total cost when firm produces 151 units = $24.55

Average revenue is calculated as follows:

Thus AR is constant

Key words: Cost, Total cost, Total fixed cost, Total variable cost, Marginal cost, Total revenue, Average revenue, Marginal revenue, competitive market.

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Answer 2

The average revenue has the same value at Q = 150 and Q = 151.

Further explanation:

Average fixed cost: The fixed cost per unit is termed as the average fixed cost. The fixed cost does not change with the level of output. However, the average fixed cost changes along with the level of output.

Total revenue: The total revenue refers to the amount of revenue generated during a particular period of time. The total revenue is the total of the revenues.

Total cost: The total cost is the sum total of the variable and fixed cost during the year. The total cost represents all the direct, and indirect costs occurred on a product.

Average total cost: The total cost per unit is also termed as the average total cost. The average total cost represents the cost, which is computed by dividing the total cost with the number of units manufactured during the year.

Calculate the total revenue when the quantity of output is 150 units:

It is given that the output is sold at $40 per unit.

$\text{Total revenue at 150 units}=\text{Number of units produced}\times\text{Sales price per unit}\\ =150\times\ 40\\=\ 6,000$

Therefore, the total revenue when the quantity of output is 150 units is $6,000.

Calculate the average revenue when the quantity of output is 150 units:

$\text{Average revenue}=\dfrac{\text{Total Revenue}}{\text{Number of units}}\\=\dfrac{\ 6,000}{150\text{units}}\\=\ 40$

Therefore, the average revenue when the quantity of output is 150 units is $40.

Calculate the total revenue when the quantity of output is 151 units:

It is given that the output is sold at $40 per unit.

$\text{Total revenue at 151 units}=\text{Number of units produced}\times\text{Sales price per unit}\\ =151\times\ 40\\=\ 6,040$

Therefore, the total revenue when the quantity of output is 151 units is $6,040.

Calculate the average revenue when the quantity of output is 151 units:

$\text{Average revenue}=\dfrac{\text{Total Revenue}}{\text{Number of units}}\\=\dfrac{\ 6,040}{151\text{units}}\\=\ 40$

Therefore, the average revenue when the quantity of output is 151 units is $40.

Justification for correct and incorrect answer:

a.

Average fixed cost: The average fixed cost changes along with the change in output level. The average fixed cost is different from that of fixed cost. Hence, this choice is incorrect.

b.

Average revenue: The average revenue is $40 at Q = 150 units and Q = 151 units. The average revenue is equal at both the levels of the output. Hence, this choice is correct.

c.

Total cost: The total cost is not the same at both the levels of the output. The total cost is different for Q = 150 units, and Q = 151 units as the average total cost is also different for both output levels. The total cost increases when the output level changes. Hence, this option is incorrect.

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Answer details  

Grade: Senior School

Subject: Cost Accounting

Chapter: Cost Behavior

Keywords: Scenario 14-4, the information below applies to, competitive firm, scenario 14-4 the information below applies to competitive firm, when the firm produces, which of the following magnitudes, average fixed cost, average revenue, average cost per unit, average total cost, at Q = 150 and Q = 151, represent the quantity of output, refer to scenario 14-4, when the firm produces and sells 150 units of output.