A firm’s total fixed cost is Rs 50. Its average variable cost at 4 units of output is Rs 25, and the short run marginal cost of the 5th unit is Rs 30. What are the SAC and the AFC at 5 units of output?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → SAC = Rs 36; AFC = Rs 10
Given:
TFC = Rs 50
AVC at 4 units = Rs 25
SMC of the 5th unit = Rs 30
In the short run, SMC is the increase in TVC from one extra unit.
\( TVC_4 = AVC \times q = 25 \times 4 = 100 \)
\( TVC_5 = 100 + 30 = 130 \)
\( TC_5 = 130 + 50 = 180 \)
\( SAC = 180/5 = 36 \)
\( AFC = 50/5 = 10 \)
SAC = Rs 36 and AFC = Rs 10
Option (2) SAC = Rs 26; AFC = Rs 10 — Rs 26 is the AVC at 5 units (130/5), not SAC.
Option (4) SAC = Rs 36; AFC = Rs 12.50 — Rs 12.50 is the AFC at 4 units (50/4).
NCERT (2026-27): “3.7.1 Short Run Costs … Just like the case of marginal product, marginal cost also is undefined at zero level of output. It is important to note here that in the short run, fixed cost cannot be changed. When we change the level of output, whatever change occurs to total cost is entirely due to the change in total variable cost. So in the short run, marginal cost is the increase in TVC due to increase in production of one extra unit of output.” “3.7.1 Short Run Costs … The short run average cost (SAC) incurred by the firm is defined as the total cost per unit of output. We calculate it as SAC = TC/q (3.7) In Table 3.3, we get the SAC-column by dividing the values of the fourth column by the corresponding values of the first column. At zero output, SAC is undefined. For the first unit, SAC is Rs 30; for 2 units of output, SAC is Rs 19 and so on.” |