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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

A Chennai insurance-claims processing firm has total fixed cost of Rs 50,000 and total variable cost of Rs 150,000 at 1,000 claims. At 1,001 claims total cost is Rs 200,300. What are the marginal cost of the 1,001st claim and the average total cost at 1,000 claims?

Total cost at 1,000 claims is Rs 200,000, so average total cost is Rs 200. The extra claim raises total cost from Rs 200,000 to Rs 200,300, giving marginal cost of Rs 300. Marginal cost exceeds average cost, so average cost will rise.

  1. AMarginal cost Rs 300; average total cost Rs 200Correct
  2. BMarginal cost Rs 200; average total cost Rs 300
  3. CMarginal cost Rs 300; average total cost Rs 150
  4. DMarginal cost Rs 150; average total cost Rs 200
  5. Marginal cost Rs 300; average total cost Rs 250

Explanation

Total cost at 1,000 claims is 50,000 + 150,000 = 200,000. Marginal cost = 200,300 - 200,000 = Rs 300. Average total cost = 200,000/1,000 = Rs 200. Rs 150 is average variable cost, a wrong base.

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