Question

Below are some cost data pertaining to Plant 1, which has total fixed costs of $1,000. Suppose that Plant 2 is exactly twice the size of Plant 1 while using (at economic capacity) twice the amount of labour and materials, and that it produces exactly twice the output. Further, assume that the prices of these inputs do not change.

Output $AC: Plant 1

10 200

20 175

30 150

40 175

50 200

60 250

70 350

Refer to the information above to answer this question. What is the output produced if the total cost in Plant 2 is $14,000? Select one:

A. 10.

B. 20.

C. 80.

D. 30.

E. 40.

Answer 1

Answer: C

Total cost (TC) of plant-1 should be calculated first.

Output	AC	TC
10	200	10 × 200 = 2,000
20	175	20 × 175 = 3,500
30	150	4,500
40	175	7,000 = matched
50	200	10,000
60	250	15,000
70	350	24,500

Since plant-2 has twice effect, the TC of 14,000 would be matched with the above if it is divided by 2; (14,000 ÷ 2 =) 7,000.

The corresponding output of TC 7,000 in the above table is 40 units. It would be twice in case of plant-2; therefore, the required output is (40 × 2 =) 80 units.

Note: Fixed cost is not relevant here.