A firm in a competitive market has the following cost structure:
Output
Total Costs
0
$1
1
$6
2
$9
3
$10
4
$17
5
$26
What is the lowest price at which this firm might choose to operate?
A)$2
B)$3
C)$4
D)$5

Question

Quizplus · Accepted Answer

The lowest price at which the firm might choose to operate is equal to the minimum average variable cost (AVC). The AVC is calculated by subtracting fixed costs from total costs and dividing by output. Here, the fixed cost is $1 (the cost at 0 output). The AVC is minimized at an output of 3 units, where AVC = ($10 - $1) / 3 = $3.

A Firm in a Competitive Market Has the Following Cost