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?

Question

Quizplus · Accepted Answer

The total cost of producing 3,000 units of output is:

Total Labor Cost = Price per labor unit x Number of labor units = $20 x 100 = $2,000
Total Raw Material Cost = Price per raw-material unit x Number of raw-material units = $8 x 500 = $4,000
Total Variable Cost = Total Labor Cost + Total Raw Material Cost = $2,000 + $4,000 = $6,000
Total Cost = Total Fixed Cost + Total Variable Cost = $4,000 + $6,000 = $10,000

Therefore, the total cost of producing 3,000 units of output is $10,000.

The average cost of producing 3,000 units of output is:

Average Variable Cost = Total Variable Cost / Number of units of output = $6,000 / 3,000 = $2.00
Average Total Cost = Total Cost / Number of units of output = $10,000 / 3,000 = $3.33

Therefore, the average cost of producing 3,000 units of output is $3.33.

Thus, the correct answer is C.

Assume a Firm Faces These Costs: Total Cost of Capital