Question

Suppose a firm has a variable cost function VC = 20Q withavoidable fixed cost of $50,000. What is the firm's average costfunction?A. AC= 50,000 +20QB. AC = 50,000/Q +20C. AC = 50,000 + 40QD. AC = 20

Answer 1

The formula for average cost (AC) is:

AC = (Total cost / Quantity)

To find the total cost, we need to add the variable cost (VC) and the avoidable fixed cost:

Total cost = VC + Fixed cost

Total cost = 20Q + 50,000

Now we can substitute this into the formula for average cost:

AC = (Total cost / Quantity)

AC = (20Q + 50,000) / Q

Simplifying this expression gives:

AC = 50,000/Q + 20

Therefore, the firm's average cost function is:

AC = 50,000/Q + 20

So, the correct answer is B.