Question

Consider a firm that is currently producing 600 sofas a month. The monthly fixed cost is $1,920, while the average total cost is $72 (the average total cost curve has the usual shape). Producing the 600th sofa increased the firm’s total costs by $70. At Q = 600, is the firm’s average variable cost curve upward sloping, horizontal, downward sloping, or vertical? Why? Explain clearly your reasoning in words.

Answer 1

Since a firm that is currently producing 600 sofas a month.

The monthly fixed cost is $1,920,

The average total cost is $72 (the average total cost curve has the usual U shape).

Producing the 600th sofa increased the firm’s total costs by $70.

MC=$70

Since Marginal cost of producing 600th units is $70.

Total variable cost= sum of all marginal cost

Average variable cost= TVC/Q

Since by increasing production level to 600th units, the MC is positive and increasing so it means TVC is also increasing, therefore average variable cost is also increasing. It means at Q = 600, is the firm’s average variable cost curve upward sloping.