1. This month, the local widget factory produced 100 widgets. The total variable
ID: 1118370 • Letter: 1
Question
1. This month, the local widget factory produced 100 widgets. The total variable cost of production was $500 and the average total cost of production was $8. a. What is the total cost? b. What is the total fixed cost? c. What is the average fixed cost? d. What is the average variable cost? 2. Jake opens a pig farm in Idaho. To start his farm, he uses his entire $50,000 of savings from his savings account. The bank was paying him $2,500 interest on his saving. Explain why the $2,500 is one of Jake's costs.
Explanation / Answer
1)
a) Total cost = ATC x quantity produced = 8 x 100 = $800
b) Total fixed cost = Total cost - Total variable cost = 800 - 500 = $300
c) AFC = Total fixed cost / quantity produced = 300/100 = $ 3
d) AVC = Total variable cost / quantity produced = 500/100 = $ 5
2)
$2500 is the opportunity cost of the interest forgone on the savings (used for starting a pig farm) which must be included in the calculation of economic profit.
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