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A West Coast refinery used the following stocks of oil in a production run of gasoline
A West Coast refinery used the following stocks of oil in a production run of gasoline. The respective costs of these stocks are shown in the adjacent column.
| Barrels | Unit Cost | |
| Light Arabian crude oil | 5000 | 64 |
| High-sulfur Alaskan oil | 20000 | 53 |
| Methyl alcohol from corn | 1000 | 84 |
| Texas medium weight crude | 6000 | 60 |
The average cost per barrel is
A. 62.50
B. 65.25
C. 60.75
D. 57
Expert Solution
The answer is D, $57. It is found by dividing total cost by quantity.
ATC = TC/Q
To find the total costs, you must multiply the quantity of each type of barrel by its cost. To find the quantity, just add the total quantity from each type of barrel:
| Barrels | Unit Cost | Total Cost per type | |
|---|---|---|---|
| Light Arabian crude oil | 5,000 | $64 | $320,000 |
| High-sulfur Alaskan oil | 20,000 | $53 | $1,060,000 |
| Methyl alcohol from corn | 1,000 | $84 | $84,000 |
| Texas medium weight crude | 6,000 | $60 | $360,000 |
| Total Barrels | 32,000 | ||
| Total Cost | $1,824,000 |
Now just divide the total cost by the quantity of barrels: $1,824,000/ 32,000 = $57
Types of Costs:
Economists use different types of costs to analyze decisions made by firms and households. Variable costs are costs that change as more production is created. Fixed costs are costs that do not change based on production. Short-run total costs are found by just adding fixed and variable costs for each level of production. Marginal costs are measured by finding the increase in total costs from moving production from one level to another.
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