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. The firm improves its production process so that it can produce 3,000 units of output by combining its fixed capital with 100 units of labor and 500 units of raw materials. What are the total cost and average cost of producing the 3,000 units of output?
A)TC = $4,000; ATC = $2.00
B)TC = $8,000; ATC = $3.00
C)TC = $10,000; ATC = $3.33
D)TC = $15,000; ATC = $6.00

Question

Quizplus · Accepted Answer

Total cost (TC) includes the cost of capital, labor, and raw materials. TC = $4,000 (capital) + ($20 * 100 labor units) + ($8 * 500 raw-material units) = $4,000 + $2,000 + $4,000 = $10,000. Average total cost (ATC) is TC divided by the quantity of output, so ATC = $10,000 / 3,000 units = $3.33.

Assume a Firm Faces These Costs: Total Cost of Capital