If a firm produces 20 units of output and incurs a total cost of $1,000 and a variable cost is $700, calculate the firm's average fixed cost of production if it expands output to 25 units. A. $300 B. $15 C. $12 D. It is impossible to determine without additional information.

The average fixed cost of production per unit is $12. So, option C is the right answer.

Explanation:

The total cost is made up of the sum of all the costs. We can say that the total cost equals total fixed costs plus total variable cost.

Total cost = Total Fixed costs + Total variable costs

1000 = Total Fixed costs + 700

1000 - 700 = Total Fixed costs

Total Fixed costs = $300

The total fixed cost is the cost that remains constant in the short run at every production level. The average fixed cost is the total fixed cost divided by the number of units. The average fixed cost falls as the output rises.

Average Fixed cost per unit at 25 units = 300 / 25  = $12 per unit

C. $12

Explanation:

First, you have to determine the fixed costs by subtracting the variable costs from the total costs:

$1,000-$700= $300

Then, considering that the fixed costs don't change when the amount of products change, you can inferred that when the output expands to 25 units, the fixed costs are $300. So, to determine the average fixed cost of production you have to divide the total fixed costs by the output:

$300/25= $12

According to this, the average fixed cost of production is $12.

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