Analyzing Firm's Average Variable Cost in the Short Run
What is the firm's current average variable cost?
Is it $250, $275, $400, or $300?
Answer:
The firm's current average variable cost is $400.
In analyzing the firm's average variable cost in the short run, we consider the scenario in which the firm is currently producing 10 units of output with a total cost of $5,000 and a fixed cost of $1,000. The task is to determine the firm's current average variable cost.
To calculate the firm's current average variable cost, we follow these steps:
Step 1:Find the variable cost by subtracting the fixed cost from the total cost.
Variable Cost = Total Cost - Fixed Cost
Variable Cost = $5,000 - $1,000 = $4,000
Step 2:Calculate the average variable cost by dividing the variable cost by the number of output units.
Average Variable Cost = Variable Cost / Output Units
Average Variable Cost = $4,000 / 10 = $400
Therefore, the firm's current average variable cost is $400. This means that for each unit of output produced, the variable cost incurred by the firm amounts to $400.