Suppose labor and capital are the only two factors used by a firm to produce pen
ID: 1115126 • Letter: S
Question
Suppose labor and capital are the only two factors used by a firm to produce pencils. Which of the following statements is true of the average variable costs of this firm?
a. The average variable cost of this firm will be equal to the ratio of the total cost of production and the quantity of output produced by the firm.
b. The average variable cost of this firm will be equal to the ratio of the quantity of output produced by the firm and the wages paid to the workers.
c. The average variable cost of this firm will be equal to the ratio of wages paid to the workers and the quantity of output produced by the firm.
d. The average variable cost of this firm will be equal to the ratio of the cost of capital and the quantity of output produced by the firm.
Explanation / Answer
The variable costs is the cost involved with the variable factor of production. The factor which varies with the level of output. The variable factor in this case is the labor. The cost of labor, that is, wages are the variable costs. To calculate the average variable costs we divide the wages paid by the output produced. AVC=TVC(Wages Paid)/Q(Output)
So the correct option should be "The average variable cost of this firm will be equal to the ratio of wages paid to the workers and the quantity of output produced by the firm".