Question

Anna owns a dog grooming salon. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average variable cost equals?

Answer 1

To answer this, first let us understand what variable cost is, A variable cost is an expense that changes in proportion with production output. Variable costs increase or decrease depending on a company's production volume; they rise as production increases and fall as production decreases.

Here Anna pays $300 per worker, for 6 workers she will have to bear a total variable cost of 300*6 = $1800

In this case total staff members will be the units of output, AVC = TVC/No of Output Units = 1800/6 = $300

Anna's AVC = $300

Please note: $600 is a fixed cost as irrepsective of the number of workers or the output she produce, she will have to bear this fixed cost. A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. In this case, rent is the fixed cost.