Final answer:
The average cost (AC) decreases by $1.50 when the firm's output increases from 40 to 50 units and their total costs increase from $1,500 to $1,800, hence the correct answer is a. AC falls by $1.50.
Step-by-step explanation:
The student's question pertains to the changes in average cost (AC) when a firm increases output from 40 to 50 units, while total costs increase from $1,500 to $1,800. To find the change in average cost, we first calculate the initial and new average costs and then compare them.Initially, the average cost for 40 units is $1,500 / 40 = $37.50 per unit. After the increase in output, the average cost for 50 units is $1,800 / 50 = $36.00 per unit. The change in average cost is thus $37.50 - $36.00 = $1.50. Since the average cost decreases by $1.50, we can conclude that the correct answer is a. AC falls by $1.50.This calculation shows the impact of incremental output on the firm's costs and can be useful in determining the optimal level of production to minimize average costs.