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Homework answers / question archive / You produce widgets
You produce widgets. Currently you produce four widgets at a total cost of $40.
a. What is your average total cost?
b. Suppose you could produce one more (the fifth) widget at a marginal cost of $5. If you do produce that fifth widget, what will your average total cost be? Has your average cost increased or decreased? Why?
c. Suppose instead that you could produce one more (the fifth) widget at a marginal cost of $20. If you do produce that fifth widget, what will your average total cost be? Has your average total cost increased or decreased? Why?
a. What is your average total cost?
If four widgets are produced at a total cost of $40, the average cost of each widget is $40/4, or $10.
b. Suppose you could produce one more (the fifth) widget at a marginal cost of $5. If you do produce that fifth widget, what will your average total cost be? Has your average cost increased or decreased? Why?
If five widgets can be produced at a total cost of $45, then the average cost of each widget is $45/5, or $9. That is lower than the average cost of $10 in (a) above. That happens if the marginal cost is lower than the average total cost.
c. Suppose instead that you could produce one more (the fifth) widget at a marginal cost of $20. If you do produce that fifth widget, what will your average total cost be? Has your average total cost increased or decreased? Why?
The fifth widget at a marginal cost of $20 would mean that the total cost for the five widgets was $60. That makes the average cost $60/5, or $12. That is higher than the original cost of $10 in scenario (a). That happens if the marginal cost is higher than the average total cost.