Suppose you are the owner of a small t-shirt printing business. while conducting a cost analysis of your business, you find that at current production levels, your average total cost (atc) is $10. you also know that if you increase production by one more unit, the marginal cost of that unit will be $5. if you produce another t-shirt?

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Suppose you are the owner of a small t-shirt printing business. While conducting a cost analysis of your business you find out that at current production levels, your average total costs (ATC) are $10. You also know that if you increase production by one more unit the marginal cost of that unit will be $5. Since you are taking a course in economics this semester, you also know that if you produce another t-shirt:

a) the marginal costs of production will increase

b) the marginal costs of production will decrease

c) the average total costs of production will increase

d) the average total costs of production will decrease

Explanation:

The correct answer is d) the average total costs of production will decrease.

This is due to fact that fixed cost allocated to unit decrease with increase in production. In other words fixed cost is fixed in total but variable per unit and variable cost is fixed per unit but variable in total.

For example a company produce product A having variable cost of 10 dollars per unit and fixed cost of the company is 100 dollars. So if company produce one quatity of A than its total cost will be 110 dollars and per unit cost will be the same but if company produce two units of A its total cost will be 120 dollars but per unit cost will be decrease to 60 dollars. (120/2)

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