Suppose a firm has a variable cost function VC = 20Q with avoidable fixed cost of $50,000.What is the firm's average cost function?
A) AC = 50,000 + 20Q
B) AC = (50,000/Q) + 20
C) AC = 50,000 + 40Q
D) AC = 20

Question

Quizplus · Accepted Answer

The formula for average cost (AC) is:
AC = (Total Cost) / (Quantity)
Total cost can be found by summing the variable and fixed costs, which gives: 
Total Cost = VC + FC = 20Q + 50,000
Substituting this into the average cost formula gives: 
AC = (20Q + 50,000) / Q
Simplifying this expression, we get: 
AC = 50,000/Q + 20. 
Therefore, the answer is (B).

Suppose a Firm Has a Variable Cost Function VC =