CFA Level I · CFA Level I Exam · The Firm and Market Structures
A perfectly competitive firm faces a market price of $20. At its profit-maximizing output of 1,000 units, average total cost is $17 and average variable cost is $14. Total fixed cost is closest to:
Total fixed cost is about $3,000. Average fixed cost equals average total cost minus average variable cost, which is $17 minus $14, or $3 per unit. Multiplying by 1,000 units gives $3,000. This figure coincides with economic profit, but that is a separate calculation.
- A$3,000
- B$6,000Correct
- C$9,000
Explanation
Average fixed cost = ATC − AVC = 17 − 14 = $3 per unit. Total fixed cost = $3 × 1,000 = $3,000. Check: TC = 17,000, variable cost = 14,000, so fixed = 3,000. Note the profit is (20−17)×1,000 = $3,000, which is a distractor, and $6,000 would be wrong here.
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