Final answer:
Average variable cost (AVC) is calculated by dividing the total variable costs by the quantity of output. It is important for firms to understand their AVC since it affects pricing and production decisions and can indicate potential profitability.
Step-by-step explanation:
The correct answer to the question "Average variable cost is:" is option b) total variable cost divided by quantity. Average variable cost (AVC) provides firms with insights into their cost per unit of output and is calculated by dividing the total variable costs by the quantity of output produced. For example, if a firm's variable costs for producing 80 haircuts amount to $400, the AVC would be $400/80, which equals $5 per haircut. Note that the AVC curve is typically U-shaped and lies below the average total cost curve because it does not include fixed costs. However, AVC gets closer to the average cost as output increases and fixed costs become relatively less significant.
If a firm's average variable cost is lower than the market price, they could potentially earn profits, assuming fixed costs are not considered. Understanding AVC is important as it impacts a firm's pricing and production decisions.