Help with ECON?

Question

With fixed costs of $400, a firm has average total costs of $3 and average variable costs of $2.50. Its output is:

A. 200 units
B. 400 units
C. 800 units
D. 1,600 units

please answer with the letter and explain how you got that answer...im not just lookin for the answer i want to understand how it was found too please. thank you =]

Answer 1

C

Average Total cost = Average Fixed Cost + Average Variable Cost.

ATC = TC/Q = FC/Q + VC/Q. (Q = quantity)

So, $ 3 = 400/Q + $2.50 (you were given AVC, ATC, but only FC)

Solving for Q

$0.50 = 400/Q

.50Q = 400

Q = 400/.50 = 800 ---> So, C.

If you want to think about it, if ATC is $3 and AVC is $2.50, then Average Fixed Cost must be the difference -- 50 cents.

To get an average fixed cost of 50 cents given fixed costs of $400, the firms must be producing twice the fixed cost -- or 800 units.

Answer 2

exactly.