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. Originally the firm produced 2,000 units of output by combining its fixed capital with 200 units of labor and 500 units of raw materials. Now the firm changes 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 happened to average total cost?
A)ATC decreased by $2.67
B)ATC increased by $2.67
C)ATC increased by $3.33
D)ATC decreased by $3.33

Question

Quizplus · Accepted Answer

ATC decreased by $2.67 because the firm is now producing more output with the same amount of inputs.

Assume a Firm Faces These Costs: Total Cost of Capital