Firm X's total fixed costs are $1,000. Its total variable costs of producing 100 units are $2,000, and its total variable costs of producing 200 units are $4,000. Which of the following will happen to firm X's average costs as it increases output from 100 to 200 units?
A) Average costs increase.
B) Average costs decrease.
C) Average costs remain constant.
D) Average costs increase slightly.

Question

Quizplus · Accepted Answer

To calculate the average cost per unit, we need to divide the total cost (fixed cost + variable cost) by the number of units produced.

At 100 units: 
Total cost = Fixed cost + Variable cost = $1,000 + $2,000 = $3,000
Average cost per unit = $3,000 / 100 = $30

At 200 units:
Total cost = Fixed cost + Variable cost = $1,000 + $4,000 = $5,000
Average cost per unit = $5,000 / 200 = $25

As we can see, the average cost per unit decreases from $30 to $25 as output increases from 100 to 200 units. This is due to economies of scale and spreading fixed costs over a larger number of units. Therefore, choice B is the correct answer.

Firm X's Total Fixed Costs Are $1,000