Chapter 6, Problem 3P

To determine

Concept Introduction:

Average Total Cost (ATC): It is also referred as the cost of a single unit, it includes the overall cost, that is the variable cost as well as the fixed cost. A firm should always maintain the price of a product above the ATC, otherwise it will result in a loss for the firm. The formula for ATC is:

Here,

• AFC is the average fixed cost.
• AVC is the average variable cost.
• ATC is the average total cost.

Average fixed cost (AFC): Fixed cost is the cost which is constant for the firm irrespective of the output produced by the firm. So the AFC is the fixed cost per unit produced by the firm. The formula to calculate the average fixed cost is:

Here,

• AFC is the average fixed cost
• TFC is the total fixed cost
• Q is the quantity of output.

Average variable cost: Variable cost is not a constant cost for the firm, it changes with the change in output. So the AVC is a per unit cost of that variable input. It is calculated as follows:

Here,

• AVC is the average variable cost
• TFC is the total fixed cost
• Q is the quantity of output.