Suppose that a firm is currently employing 10 workers, the only variable input, at a wage rate of $100. The average physical product of labor is 25, the last worker added 10 units to total output, and total fixed cost is $5,000 At the current output rate, is average variable cost increasing, constant, or decreasing?

Average Cost is decreasing.

Explanation:

Marginal Cost is the cost of producing one unit of product.

So, here cost of adding one extra Labour unit is $100.

Extra Quantity produced = 10

So, Marginal Cost = $100/10 = $10

Total Variable Cost = $100 * 10 = $1000

Total Output = 25* 10 = 250 (See the next Part)

Average Variable Cost = Total Variable Cost/ Total Output = $4

Average Physical Product = 25

No. of Workers = 10

Total Output = 25 * 10 = 250 units

Total Variable cost = $1000 (from part (a))

Total Fixed Costs = $5000

So, Total Cost = $6000

Total Output = 250

So, Average Total Cost = $6000/$250 = $24

Till the point when MC< AC, the AC is decreasing.

Here in our situation, MC = $10 and AC = $24. So, MC < AC.

So, Average Cost is decreasing