When output rises from 20 to 30 units, total cost increases from Rs500 to Rs600, while fixed costs remain at Rs200. Which statement is accurate ?
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Answer: B. Average cost rises
Explanation
Average cost is calculated by dividing total cost by the total quantity of output produced. When output rises from 20 to 30 units, total cost increases from 500 to 600 rupees. Initial average cost was 25 rupees, and new average cost is 20 rupees, indicating a fall. Total cost consists of the sum of fixed costs and variable costs within a firm. Fixed costs remain constant regardless of production volume changes over short time horizons. Marginal cost represents the cost incurred by producing an additional unit of output.
Business managers analyze cost structures carefully to determine optimal pricing and production levels. Economies of scale often cause average costs to decline as production volume expands. Cost accounting principles help firms evaluate operational efficiency during periods of expansion. Marginal cost for the ten extra units is actually 10 rupees rather than 20. Average cost decreases in this specific numerical scenario rather than rising. Variable cost rises by 100 rupees since total cost grows by 100 and fixed costs stay constant.
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