- Fixed Cost: a cost that does not depend on the quantity of output produced; the cost of the fixed input
- Variable Cost: a cost that depends on the quantity of output produced; the cost of the variable input
- Total Cost: the sum of the fixed cost and the variable cost of producing a quantity of output; TC=FC+VC
- Average Fixed Cost: the fixed cost per unit of output; AFC = FC/Q
- Average Variable Cost: variable cost divided by the quantity of output; AVC = VC/Q
- Average Total Cost: total cost divided by quantity of output produced; ATC=TC/Q
Questions:
- If the variable cost for 100 units of a good is $2000, what is the variable cost of 1 unit?
- You are a farmer who owns a corn field. As you hire more laborers, what happens to marginal product?
- Why does the AFC decrease as you produce more?
Answers:
- $20
- The marginal product decreases.
- The spreading effect. You are dividing the same number by an increasing number.