Final answer:
The question addresses calculating average costs at a specific production level for a company and its implications for profits. Losses occur when the selling price is below the average cost, and producing extra units with higher marginal costs than the selling price may not be beneficial. The concept of economies of scale is also discussed with examples of different production plants.
Step-by-step explanation:
The question relates to calculating the average costs per unit within a specified range of production for a company. In the provided example, the relevance of the average cost is highlighted when determining profitability. If a company's selling price is lower than its average cost, the company is not making a profit. For instance, with an average cost of $26 per unit and a selling price of $25 per unit, the firm incurs a loss of $1 per unit. Therefore, if the company produces and sells five units, this leads to a total loss of $5.
Furthermore, this example discusses marginal costs in relation to the production of five units. If marginal costs, which are $30 per unit, exceed the price of $25 per unit, then the additional units produced are reducing profit rather than increasing it, suggesting that the company should produce fewer units.
Economies of scale are also explained through different production plants with varying average costs. A plant experiencing economies of scale has a lower average cost per unit produced as its output level increases, up to a certain point.