• The correct answer is Option B.

a. Let us determine the average total cost for the first 24 houses.

Averagetotalcost=TotalcostQuantityAveragetotalcost=4.80million24Averagetotalcost=0.2millionor200,000Averagetotalcost=TotalcostQuantityAveragetotalcost=4.80million24Averagetotalcost=0.2millionor200,000

The average total cost for the first 24 houses is $200,000.

b. Let us determine the marginal cost of the 25th house.

Marginalcost=ChangeintotalcostChangeinquantityMarginalcost=5.05million−4.80million25−24Marginalcost=0.25millionor250,000Marginalcost=ChangeintotalcostChangeinquantityMarginalcost=5.05million−4.80million25−24Marginalcost=0.25millionor250,000

The marginal cost of the 25th house is $250,000.

c. The company should not build the 25th house if it sells for $202,000 because the marginal cost is greater than the selling price. It will incur a loss or a decrease in profit.

Average Total Cost:

The average total cost tells us how much a firm incurs for each unit of output. It is the mean cost based on the total output produced. It can also be determined by adding the average fixed cost and the average variable cost.