Chapter 7: Problem 23

Which costs are measured on per-unit basis: fixed costs, average cost, average variable cost, variable costs, and marginal cost?

Short Answer

Expert verified

The costs measured on a per-unit basis are average cost (AC), average variable cost (AVC), and marginal cost (MC). Fixed costs and variable costs are not measured on a per-unit basis.

Step by step solution

Understand Fixed Costs

Fixed costs are expenses that do not change with the level of output. They are the costs incurred by a business even if production is zero. Examples of fixed costs include rent, salaries, and insurance. Fixed costs are not measured on a per-unit basis as they do not change with the level of production.

Understand Average Cost

Average cost (or average total cost) refers to the total cost of production divided by the number of units produced. It is calculated by adding fixed costs and variable costs, then dividing the sum by the quantity of output. Since average cost considers the cost per unit of output, it is measured on a per-unit basis.

Understand Average Variable Cost

Average variable cost is the variable cost of production, which changes as the output level changes, divided by the number of units produced. Examples of variable costs include raw materials, hourly wages, and utilities. Average variable cost is calculated by dividing the total variable cost by the quantity of output and, hence, is measured on a per-unit basis.

Understand Variable Costs

Variable costs are the costs that vary, depending on the level of production. As production increases, variable costs increase and vice versa. Examples include raw materials, hourly wages, and utilities. Variable costs are not measured on a per-unit basis since they change based on the level of production.

Understand Marginal Cost

Marginal cost is the change in the total cost that arises when the quantity produced changes by one unit. It represents the additional cost to produce one more unit of output. Mathematically, it is calculated as the change in total cost divided by the change in output. Marginal cost is measured on a per-unit basis as it refers to the cost per unit of additional output.

Conclusion

In summary, the costs measured on a per-unit basis are average cost, average variable cost, and marginal cost. Fixed costs and variable costs are not measured on a per-unit basis, as they do not consider the cost per individual unit of output.

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