Variable costs (VC) are the costs that change when a firm changes production. Fixed costs (FC) are costs that do not change based on production and total costs (TC) are the sum of fixed and variable costs. Here are the relevant formulas when finding these types of costs:

TC = FC + VC

FC = TC - VC

VC = TC - FC

To find the average of any of these types of costs, you just divide the costs by the quantity produced. Here are formulas:

ATC = TC/Q

AVC = VC/Q

AFC = FC/Q

Since TC = FC + VC, then to calculate ATC, you just add the average fixed and average variable costs:

ATC = AFC+AVC

In this problem, we are told that FC = $2,000,000, Q = 10,000 and TC = $5,000,000

AFC = $2,000,000/10,000 = $200

ATC = $5,000,000/10,000 = $500

To find AVC just plug our answers into the ATC formula and solve for AVC:

$500 = $200 + AVC

AVC = $300

Types of Costs:

The subject of Microeconomics views costs differently than accounting. Economists differentiate types of costs facing firms and consumers to make more effective decision making. Opportunity cost refers to what has been given up when a decision has been made and marginal costs measure the difference in cost when moving from one production level to another. It is also common to find average costs in microeconomics to help to calculate total profit.