If a firm produces 20 units of output and incurs a total cost of $1000, and the variable cost is $700, calculate the firm's average fixed cost of production if it expands output to 25 units.
A) $300
B) $15
C) $12
D) It is impossible to determine without additional information.

Question

Quizplus · Accepted Answer

To calculate the average fixed cost, we first need to calculate the total fixed cost.

Total cost = Fixed cost + Variable cost

We know that when the firm produced 20 units, the total cost was $1000 and the variable cost was $700.

$1000 = Fixed cost + $700

Fixed cost = $300

So, when the firm produces 20 units, the fixed cost is $300.

To calculate the average fixed cost, we divide the fixed cost by the level of output:

Average fixed cost = Fixed cost / Output

When the firm expands output to 25 units, the fixed cost remains the same ($300).

Therefore, the average fixed cost of production when the firm expands output to 25 units is:

Average fixed cost = $300 / 25 units = $12

Therefore, the best choice is C, $12.

If a Firm Produces 20 Units of Output and Incurs