7. You produce widgets. Currently you produce four widgets at a total cost of $4

Question

7. You produce widgets. Currently you produce four widgets at a total cost of $40. a. What is your average total cost? b. Suppose you could produce one more (the fifth) widget at a marginal cost of $5. If you do produce that fifth widget, what will your average total cost be? Has your average cost increased or decreased? Why? c. Suppose instead that you could produce one more (the fifth) widget at a marginal cost of $20. If you do produce that fifth widget, what will your average total cost be? Has your average total cost increased or decreased? Why?

Explanation / Answer

Given : Total cost of four gadets = 40

a.) Average total cost = total cost / total quantity produced = 40/10 =4

b.) Now the cost of producing one more unit is $ 5 so the total cost = 40 +5 =45

Average total cost in this case = 45/5 =9

Average cost has decreased because the additional cost of production has decreased.

c.) total cost = 40 +20 = 60

Average total cost =60/5 =12

Average total cost has increased because addtional cost of production has increased from 10 to 20.

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