Question 32

Average variable cost (AVC)

Average variable cost (AVC) is calculated using the formula variable costs (VC) divided by quantity (Q), which reflects the variable costs incurred per unit of output produced.

A) Total cost (TC)

Total cost (TC) is the sum of fixed costs and variable costs, represented by the formula TC = FC + VC. This option is incorrect because the formula VC - Q does not produce total cost; instead, it focuses solely on variable costs and quantity.

B) Explicit cost (EC)

Explicit costs refer to direct, out-of-pocket expenses for a business, such as wages and materials. The formula VC - Q does not align with the calculation of explicit costs, making this option incorrect in the context of the question.

C) Average variable cost (AVC)

Average variable cost (AVC) is indeed calculated by dividing total variable costs (VC) by the quantity of output (Q). This formula directly relates to the definition of AVC, confirming that this is the correct answer.

D) Implicit cost (IC)

Implicit costs represent the opportunity costs of using resources in a particular way rather than in their next best alternative. The formula VC - Q does not apply to implicit costs, and thus this option is also incorrect.

Conclusion

Average variable cost (AVC) is the only option that accurately corresponds to the given formula, as it specifically involves the division of variable costs by quantity. All other options either relate to different cost concepts or do not align with the formula provided, reinforcing that AVC is the correct and definitive answer.