Assume a firm faces these costs: total cost of capital = $4,000; price paid for labor = $20 per labor unit; and price paid for raw materials = $8 per raw-material unit. If the firm can produce 2,000 units of output by combining its fixed capital with 200 units of labor and 500 units of raw materials, what are the total cost (TC)and average total cost (ATC)of producing the 2,000 units of output?
A)TC = $4,000; ATC = $4.00
B)TC = $8,000; ATC = $5.00
C)TC = $12,000; ATC = $6.00
D)TC = $15,000; ATC = $8.00

Question

Quizplus · Accepted Answer

Total Cost (TC) = Total cost of capital + (Price paid for labor * Number of labor units) + (Price paid for raw materials * Number of raw material units) = $4,000 + ($20 * 200) + ($8 * 500) = $4,000 + $4,000 + $4,000 = $12,000. Average Total Cost (ATC) = TC / Quantity of output = $12,000 / 2,000 = $6.

Assume a Firm Faces These Costs: Total Cost of Capital