a. Gizmos, Inc. produces gizmos at an average total cost (ATC) of $15 and an ave

Question

a. Gizmos, Inc. produces gizmos at an average total cost (ATC) of $15 and an average variable cost (AVC) of $10. THe only fixed input used in th eproduction of gizmos costs $200. What are the total costs (TC) of producing gizmos?

b. Alejandro is one of the leading widget producers in the country. His total costs (TC) amount to $5,000, total fixed costs (TFC) are $3,000, and average total costs (ATC) are $200. What are Alejandro's average variable costs at the present level of production?

c. Refer to exhibit 21-7. Calculate the average variable cost (AVC) of producing 6 units of output.

                       

2

Output TC 0 $20 1 $30

2

$41 3 $51 4 $65 5 $75 6 $84 7 $105

Explanation / Answer

a). ATC = AVC + AFC

15 = 10 + AFC,

15 = 10 + TFC/Q

15 = 10 + 200/Q

Q = 40

TC = AC*Q = 15*4= 600

b). TC = 5000, TFC = 3000, AC = 200

AC = TC/Q

200 = 5000/Q

Q = 25.

To calculate AVC, we need TVC, TVC = TC - TFC

TVC = 5000 - 3000 = 2000

AVC = TVC/Q = 2000/25 = 80.

c).

Output TC TFC TVC AVC 0 $20 $20 $0 … 1 $30 $20 $10 10.00 2 $41 $20 $21 10.50 3 $51 $20 $31 10.33 4 $65 $20 $45 11.25 5 $75 $20 $55 11.00 6 $84 $20 $64 10.67 7 $105 $20 $85 12.14

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