With the highly anticipated release of the latest Star Wars film, fans wish to r

Question

With the highly anticipated release of the latest Star Wars film, fans wish to relive the glory of the previous movies. As a result, a perfectly competitive market for Star Wars DVD box sets has formed. George is a producer in this market, and has total fixed costs of $250. Other data relating to costs and output are shown in the table below: QuantityAverage Total Cost (box sets) ATC (S/box set) 10 20 35 19.50 12.25 10 Using this information, calculate what quantity George needs to produce so that his average variable cost will be $6 per box set? Answer to the nearest whole number (with no decimal places)

Explanation / Answer

Answer

total Cost(TC) = Total Fixed Cost(TFC) + Total Variable cost(TVC)

=> TC/ Q = TFC/Q + TVC/Q

=> Average Total Cost(ATC) = Average Fixed Cost(AFC) + Average Variable Cost(AVC)

=> Average Total Cost = 250/Q + Average Variable Cost

Now Average Variable Cost = 6

=> ATC = 250/Q + 6. Hence We have to find Q that satisfis this equation.

We can see from the above table When Q = 40, ATC = 12.25.

And Also When Q = 40, AFC = 250/40 = 6.25 and Hence At Q = 40.

ATC = AFC + AVC

=> 12.25 = 6.25 + AVC

Hence AVC = 6.

Hence George needs to Produce 40 Box Sets.

Hence, Quantity = 40

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