Question

Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when four units of output are produced, the total cost is $175, and the average variable cost is $33.75. What is the fixed cost of the firm?

Answer 1

Answer: $40

Explanation: Cost can be defined as the total resources of several forms used by the firm for the production of output. Cost can further be categorized into two parts fixed cost and variable cost. The cost that remains unchanged irrespective of the level of output is called fixed and the one that change with the level of output is called variable cost.

Therefore,

cost = fixed cost  + variable cost

$175 = fixed cost + ($33.75 * 4 )

fixed cost = $175 - $135

               = $40