Final answer:
Average cost tells a firm whether it can earn profits given the current price in the market and is also known as the firm's profit margin. Step 1 is to determine the cost structure for the firm.
Step-by-step explanation:
Average cost tells a firm whether it can earn profits given the current price in the market. If we divide profit by the quantity of output produced we get average profit, also known as the firm's profit margin. Expanding the equation for profit gives:
Step 1. Determine the cost structure for the firm.
For a given total fixed costs and variable costs, calculate total cost, average variable cost, average total cost, and marginal cost. Follow the formulas given in the Production, Costs, and Industry Structure chapter. These calculations are in Table 8.8.