Question

Two car manufacturers, Saab and Volvo, have fixed costs of $1 billion and marginal costs of $15,000 per car. If Saab produces 500,000 cars per year and Volvo produces 200,000 cars per year, calculate the average production cost for each company.

Answer 1

Average production cost for Saab is $17000

Average production cost for Volvo is $20,000

Step-by-step explanation:

In order to calculate average production cost for each car manufacturer,the formula below comes handy:

Average Total cost = Fixed cost/Quantity + Marginal cost

Saab:

Average Total cost=($1,000,000,000/500,000)+$15000=$17000

Volvo:

Average Total cost=($1,000,000,000/200,000)+$15000=$20000