Which of the following statement (s) is/are correct?
Statement 1: At zero level of output, both AFC and AVC are undefined.
Statement 2: For any level of output, the sum of marginal costs up to that level gives us the total variable cost at that level.
Answer & explanation
Correct answer: option 3
The correct answer is option 3: Both statements are correct.
- Statement 1: At zero level of output, both AFC and AVC are undefined.
- AFC (Average Fixed Cost) is indeed undefined at zero output because you're dividing a positive fixed cost by zero.
- AVC (Average Variable Cost) at zero output is 0/0. While mathematically debated, in economic terms regarding cost functions, it is also considered undefined. Therefore, Statement 1 is correct.
- Statement 2: For any level of output, the sum of marginal costs up to that level gives us the total variable cost at that level.
- This statement is also correct. Marginal cost represents the change in total cost (which is the change in total variable cost) from producing one more unit. Therefore, summing the marginal costs from the first unit up to a given level of output will indeed give you the total variable cost at that level.