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Chapter 11: Problem 3

Suppose the total cost of producing 10,000 tennis balls is \(\$ 30,000\), and the fixed cost is \(\$ 10,000\). a. What is the variable cost? b. When output is 10,000 , what are the average variable cost and the average fixed cost? c. Assume that the cost curves have the usual shape. Is the dollar difference between the average total cost and the average variable cost greater when the output is 10,000 tennis balls or when the output is 30,000 tennis balls? Explain.

Short Answer

Expert verified
a. The variable cost is $20,000. b. The average variable cost is $2 and the average fixed cost is $1. c. The difference between the average total cost and average variable cost is greater when output is 10,000 tennis balls due to the larger average fixed cost per unit.

Step by step solution

01

Calculate Variable Cost

To find the variable cost, subtract the fixed cost from the total cost. That is, variable cost = total cost - fixed cost = $30,000 - $10,000 = $20,000.
02

Calculate Average Variable Cost and Average Fixed Cost

Average variable cost is the variable cost divided by the quantity, thus Average Variable Cost = Variable Cost / Quantity = $20,000 / 10,000 = $2. \n Similarly, Average Fixed Cost = Fixed Cost / Quantity = $10,000 / 10,000 = $1.
03

Discuss the Differences between Average Total Cost and Average Variable Cost

In order to analyze the difference between the average total cost and average variable cost, we need to understand that the average fixed cost decreases as the quantity increases and the average variable cost remains constant if variable cost doesn't vary with the output. Therefore, the difference between the average total cost (which is the sum of average variable cost and average fixed cost) and average variable cost would be smaller at 30,000 than it is at 10,000. This is due to the decrease in the average fixed cost as output increases.

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Most popular questions from this chapter

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