Question

3. Concerning costs of production, it is true that:

a.) marginal costs equal the average total cost multiplied by the output level

b.) if a firm shuts down for a month its total costs for the month will equal to its fixed costs for the month

c.) marginal costs equal the change in total cost divided by the change in variable costs

d.) average variable costs equal total variable costs multiplied by the output level

Answer 1

The correct answer is (b) if a firm shuts down for a month its total costs for the month will equal to its fixed costs for the month

Total Cost(TC) = Average Cost* Quantity

=> Average Cost(AC) = Total Cost/Output = TC/Q

Marginal Cost(MC) = change in total cost divided by the change in output =

Hence option (c) is incorrect

Average Variable Cost = Total Variable cost. Hence option d is incorrect

Fixed cost is the cost that firms incurs before production. Hence If firm operates or not. He must incurs fixed cost. Variable cost depends on output produced and if output produced = 0 then Variable cost = 0. Hence when firm shut down it only incurs Fixed cost.

Hence, the correct answer is (b) if a firm shuts down for a month its total costs for the month will equal to its fixed costs for the month