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Homework answers / question archive / The Wacky Widget company has total fixed costs of $100,000 per year
The Wacky Widget company has total fixed costs of $100,000 per year. The firm's average variable cost is $5 for 10,000 widgets. At that level of output, the firm's average total costs equal:
a. $10
b. $15
c. $100
d. $150
The correct answer to the given question is option b. $15.
The average fixed cost is given by:
=Total fixed costOutput level=Total fixed costOutput level
=$100,00010,000=$100,00010,000
=$10=$10
The firm's average total cost is given by:
=Average fixed cost + average variable cost=Average fixed cost + average variable cost
=$10+$5=$10+$5
=$15=$15
In the parlance of economics, the total cost incurred by a firm may be bifurcated into fixed costs and variable costs. The total fixed cost does not change with production volume while the total variable cost varies proportionately with production volume. One can also determine marginal cost and average cost for analysis.
