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A factory producing cables for personal computers finds that its current average cost of production is $11
A factory producing cables for personal computers finds that its current average cost of production is $11.97 and its marginal cost of production is $18.54, at the current output of 1,041 cables per month. The output is increased to 1,288 cables per month. At this new output,
a. average cost will be higher than at the old output.
b. average cost will be lower than at the old output.
c. average cost could be either higher or lower than it was at the old output.
d. average cost will increase so that it exceeds marginal cost.
Expert Solution
- The correct answer is a. average cost will be higher than at the old output.
The formula to determine the average total cost is:
Averagetotalcost=TotalcostTotaloutputorAveragetotalcost=Averagefixedcost+AveragevariablecostAveragetotalcost=TotalcostTotaloutputorAveragetotalcost=Averagefixedcost+Averagevariablecost
The formula to determine the marginal cost is:
Marginalcost=ChangeintotalcostChangeintotaloutputMarginalcost=ChangeintotalcostChangeintotaloutput
The marginal cost is the increase in cost for producing the last output. When the marginal cost is higher than the average cost of production, the average cost will increase, and vice versa. Based on the current output of 1,041 cables per month, the average cost ($11.97) is less than the marginal cost ($18.54). This means that the average cost is increasing. Therefore, the increase in output to 1,288 cables per month will have an average cost that the old output.
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