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A firm producing 7 units has an average total cost of ₹ 150 and must pay ₹ 350 to its fixed factors whether or not it produces. How much of the average total cost is made up of variable cost (i.e. the AVC)?
A₹ 50
B₹ 300
C₹ 200
D₹ 100
Answer & Solution
Correct answer: D. ₹ 100
1. ATC = AFC + AVC, so AVC = ATC − AFC.
2. AFC = TFC / Q = 350 / 7 = ₹ 50.
3. AVC = ATC − AFC = 150 − 50 = ₹ 100.
4. ₹ 50 (A) is AFC not AVC; ₹ 200 (C) and ₹ 300 (B) misuse the figures. Hence AVC = ₹ 100.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.20–21_
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