Question

Suppose that each firm in an industry has a total cost curve given by TC = 7,000 + 50Q. The lowest average total cost of producing 1,000 units of output occurs when:
a. one firm produces all 1,000 units of output.
b. four firms each produce 250 units of output.
c. 10 firms each produce 100 units of output.
d. two firms each produce 500 units of output.

Answer 1

Answer:

The correct answer is a. one firm produces all 1,000 units of output.

Explanation:

The total cost TC to calculate the accounting equilibrium point PE considers the fixed costs FC that have no dependence on the quantity produced Q and the total variable costs CVT that depend on the quantity produced Q.

For example, a producer will pay the same amount for rent regardless of the amount he produces, but will incur a cost for raw materials that will vary according to the number of units produced.

The fixed costs do not depend on the volume of production, however, the variable costs do depend on the volume or level of production.