Asked by Elizabeth Carney on Jun 22, 2024
Verified
Refer to Table 8.1. Assume that the relevant time period is the short run. Assuming the price of labor (L) is $5 per unit and the price of capital (K) is $10 per unit, the average variable cost of producing two units of output is
A) $20.
B) $40.
C) $90.
D) $100.
Average Variable Cost
The cost a company incurs for each unit of output produced, excluding any fixed costs.
Price of Labor
The wage rate that employers pay workers for their labor services, influenced by supply and demand dynamics in the labor market.
Price of Capital
The cost associated with using financial capital, often reflected in interest rates or returns demanded by investors.
- Assess financial outlays to guide decisions in business related to output volumes and minimizing expenses.
Verified Answer
SF
Samar FaresJun 24, 2024
Final Answer :
C
Explanation :
The average variable cost (AVC) is calculated by dividing the total variable cost (TVC) by the quantity of output produced. For two units of output using technique A, the inputs are 14 units of K and 12 units of L. The cost of K is $10 per unit, and the cost of L is $5 per unit. Thus, TVC = (14 * $10) + (12 * $5) = $140 + $60 = $200. Since two units are produced, AVC = $200 / 2 = $100. However, for technique B, the inputs are 8 units of K and 20 units of L, leading to TVC = (8 * $10) + (20 * $5) = $80 + $100 = $180. Thus, AVC = $180 / 2 = $90. Since the question asks for the average variable cost of producing two units of output without specifying the technique, and the calculation shows the cost for both techniques A and B, the correct answer is based on the lower cost between the two techniques, which is $90 for technique B.
Learning Objectives
- Assess financial outlays to guide decisions in business related to output volumes and minimizing expenses.