Chapter 11, Problem 12P

To determine

Concept Introduction:

Fixed cost (FC): It is a cost which is constant in the short run, it is not related to any change in the production of goods or service, it will be fixed disregarding of an increase or decrease in output.

Variable cost (VC): This cost is directly proportional to the level of output produced, it increases with the increase in output and vice versa.

Average Total Cost (ATC): It is also referred as the cost of a single unit, it includes the overall cost, that is the variable cost as well as the fixed cost. A firm should always maintain the price of a product above the ATC, otherwise it will result in loss for the firm. The formula for ATC is:

Here,

• AFC is the average fixed cost.
• AVC is the average variable cost.
• ATC is the average total cost.

Average fixed cost (AFC): This is the cost, which is constant for the firm irrespective of the output produced by the firm. So the AFC is a fixed cost per unit produced by the firm. It refers to the total fixed cost divided by the output.

Here,

• AFC is the average fixed cost
• TFC is the total fixed cost
• Q is the quantity of output.