A firm with only fixed costs will have which of the following average cost relationships? As production increases, average total cost will:
Question
A firm with only fixed costs will have which of the following average cost relationships? As production increases, average total cost will:
Solution
A firm with only fixed costs will see its average total cost decrease as production increases. Here's why:
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Fixed costs are costs that do not change with the level of output. Examples include rent, salaries, and equipment.
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Average total cost is calculated by dividing total cost by the quantity of output.
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If a firm only has fixed costs, then its total cost remains constant regardless of output.
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As output increases, the same total cost is spread over more units of output.
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Therefore, the average total cost per unit decreases as output increases.
So, the relationship between production and average total cost for a firm with only fixed costs is that average total cost decreases as production increases.
Similar Questions
Q10 An industry currently has 100 firms, each of which has fixed cost of $16 and average variable cost as follows: Quantity: 1, 2, 3, 4, 5, 6 Average variable cost: $1, 2, 3, 4, 5, 6 a) Compute a firm's marginal cost and average total cost for each quantity from 1 to 6. b) The equilibrium price is currently $10.How much does each firm produce? What is the total quantity supplied in the market? c) In the long run, firms can enter and exit the market, and all entrants have the same costs as above. As this market makes the transition to its long-run equilibrium,will the price rise or fall? Will the quantity demanded rise or fall? Will the quantity supplied by each firm rise or fall? Explain your answers. d) Graph the long-run supply curve for this market, with specific numbers on the axes as relevant.
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