Choose the correct equations in the context of costs.
(A) TFC = AFC × quantity
(B) LRMC = (TC at $q_n$ units) - (TC at $q_n$ - 1 units)
(C) TC = TVC × TFC
(D) LRAC = TC/q
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
Statement (A): TFC = AFC × quantity. Correct. Total Fixed Cost (TFC) is equal to Average Fixed Cost (AFC) multiplied by the quantity of output. This is a standard relationship in cost accounting, as AFC = TFC / Q implies TFC = AFC × Q.
Statement (B): LRMC = (TC at $q_n$ units) - (TC at $q_n$ - 1 units). Correct. Long run marginal cost (LRMC) is the change in total cost per unit of change in output. When output changes in discrete units, then, if we increase production from $q_1$–1 to $q_1$ units of output, the marginal cost of producing $q_1$th unit will be measured as: LRMC = (TC at $q_n$ units) - (TC at $q_n$ - 1 units)
Statement (C): TC = TVC × TFC. Incorrect. The correct total cost equation is TC = TFC + TVC.
Statement (D): LRAC = TC / q. Correct. Long Run Average Cost (LRAC) is defined as Total Cost divided by Quantity (LRAC = TC/q), assuming that all factors of production are variable.