Question

1)

As a firm’s production increases:

Group of answer choices

a Average variable costs increase initially and eventually decrease

b Average fixed costs will increase

c Average total costs decrease initially and eventually increase

d Total fixed costs will decrease

e Its total variable costs increase initially and eventually decrease

2)

Mr. Hudson notes that if he produces 10 pairs of shoes per day, his average fixed cost (AFC) is $14, and his marginal cost is $8; if he produces 20 pairs of shoes per day, his MC is $15. What is his AFC when output is 20 pairs of shoes per day?

Group of answer choices

a 7

b 15

c 5

d 8

Answer 1

Ans. 1) c. Average total costs will decrease initially and eventually increase.

The average total costs first decreases since as the firm increases its output the average variable costs decreases due to the increasing returns to the variable cost initially. After a certain level of output, the average variable cost and hence the average total cost will increase due to diminishing returns.

Ans. 2) Total fixed cost = Average fixed cost * Quantity

Thus, Total fixed cost = $14 * 10 = $140

Average fixed cost when 20 units are produced = Total fixed cost / Quantity = $140 / 20 = $7

a) $7