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

A firm's total cost for producing 10 units is ₹5,000 and for 11 units is ₹5,260. Its total fixed cost is ₹1,000. What are the marginal cost of the 11th unit and the average variable cost at 10 units?

Marginal cost of the 11th unit is ₹260, the increase in total cost. Average variable cost at 10 units is ₹400, found by removing the ₹1,000 fixed cost from ₹5,000 and dividing the ₹4,000 variable cost by 10 units.

  1. AMarginal cost ₹260; average variable cost ₹400Correct
  2. BMarginal cost ₹260; average variable cost ₹500
  3. CMarginal cost ₹236.4; average variable cost ₹400
  4. DMarginal cost ₹400; average variable cost ₹260
  5. Marginal cost ₹5,260; average variable cost ₹4,000

Explanation

Marginal cost = 5,260 - 5,000 = ₹260. Variable cost at 10 units = 5,000 - 1,000 = ₹4,000, so average variable cost = 4,000/10 = ₹400. The ₹500 option wrongly uses total cost per unit, which includes fixed cost.

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