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CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production

A firm's total cost function is TC = 5,000 + 40Q, where Q is output in units. Which statement correctly describes its short-run cost behaviour?

Marginal cost is Rs 40 at every output level. The cost function has a fixed part of Rs 5,000 and a variable part of Rs 40 per unit, so each additional unit adds exactly Rs 40 to total cost. Average fixed cost falls and average variable cost stays constant.

  1. AAverage fixed cost rises as Q increases
  2. BMarginal cost is Rs 40 at every output levelCorrect
  3. CAverage variable cost rises as Q increases
  4. DTotal fixed cost is Rs 40 per unit and constant

Explanation

Fixed cost is 5,000 and variable cost is 40Q. Marginal cost is the change in TC for one more unit, which is 40 at all outputs. Average fixed cost 5,000/Q falls as Q rises, AVC is constant at 40, and fixed cost is Rs 5,000 in total, not Rs 40 per unit.

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