Average Total Cost Calculation based on Production Levels

What can we infer about the Average Total Cost when the firm is producing 19 units?

Select one: a. It is greater than 3200/19 b. It is less than 3200/19 c. It is greater than 3200/20 d. It is less than 3200/20

Answer:

The correct answer is (d) It is less than 3200/20.

When analyzing the Average Total Cost (ATC) of a firm, we need to consider both the fixed costs and the variable costs involved in the production process.

In this scenario, the firm has fixed costs amounting to $3,000 and the variable cost of producing 20 units is $200 per unit.

To calculate the Total Cost, we sum the Fixed Costs with the Variable Costs multiplied by the number of units produced:

Total Cost = Fixed Costs + (Variable Cost per Unit × Number of Units)

Substitute the values: Total Cost = $3,000 + ($200 × 20) = $7,000

Now, we can determine the Average Total Cost (ATC) by dividing the Total Cost by the number of units:

ATC = Total Cost / Number of Units

ATC = $7,000 / 20 = $350

Therefore, the ATC for producing 20 units is $350.

Since the variable costs remain unchanged for producing 19 units, the ATC for producing 19 units will be less than $350. Hence, the correct inference is that the Average Total Cost when the firm is producing 19 units is less than $350, which corresponds to option (d).

By understanding the relationship between fixed costs, variable costs, and production levels, we can make accurate assessments of the Average Total Cost at different levels of output.