Analyzing Firm's Average Variable Cost in the Short Run

What is the firm's current average variable cost?

Is it $250, $275, $400, or $300?

Answer:

The firm's current average variable cost is $400.

In analyzing the firm's average variable cost in the short run, we consider the scenario in which the firm is currently producing 10 units of output with a total cost of $5,000 and a fixed cost of $1,000. The task is to determine the firm's current average variable cost.

To calculate the firm's current average variable cost, we follow these steps:

Step 1:

Find the variable cost by subtracting the fixed cost from the total cost.

Variable Cost = Total Cost - Fixed Cost

Variable Cost = $5,000 - $1,000 = $4,000

Step 2:

Calculate the average variable cost by dividing the variable cost by the number of output units.

Average Variable Cost = Variable Cost / Output Units

Average Variable Cost = $4,000 / 10 = $400

Therefore, the firm's current average variable cost is $400. This means that for each unit of output produced, the variable cost incurred by the firm amounts to $400.

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