CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production
A firm in Ludhiana has fixed cost of ₹600. Its total cost at 5 units is ₹1,100 and at 6 units is ₹1,260. What is the average variable cost at 6 units, and how does it compare with the marginal cost of the 6th unit?
Average variable cost at 6 units is ₹110 and the marginal cost of the 6th unit is ₹160, so marginal cost is above AVC. Variable cost is 1,260 minus fixed 600, giving 660, divided by 6. Marginal cost is 1,260 minus 1,100. Hence AVC is rising.
- AAVC ₹110; MC ₹160, MC above AVCCorrect
- BAVC ₹110; MC ₹160, MC below AVC
- CAVC ₹210; MC ₹160, MC below AVC
- DAVC ₹110; MC ₹110, MC equal to AVC
Explanation
Variable cost at 6 units = 1,260 − 600 = 660, so AVC = 660/6 = ₹110. At 5 units AVC = 500/5 = ₹100. MC of the 6th unit = 1,260 − 1,100 = ₹160, which exceeds AVC, so AVC is rising. ₹210 is average total cost (1,260/6), a wrong base.
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