Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does the average total cost curve signify?

1. The sum of total revenue and total cost

2. The average fixed costs divided by the number of units produced

3. The sum of average fixed costs and average variable costs

4. The cost of producing a single unit

The correct answer is: The sum of average fixed costs and average variable costs

The average total cost curve signifies the average cost per unit produced when both fixed and variable costs are taken into account. It is calculated by dividing the total costs associated with production by the number of units produced. This means that the average total cost includes both the average fixed costs, which do not change with the level of output, and the average variable costs, which do vary with the level of output. The average total cost curve is vital for decision-making as it shows firms how their costs change with different levels of production. Understanding where this curve lies in relation to the price level can help firms determine whether they can cover their costs and make a profit. In contrast, the other options do not appropriately describe the average total cost curve: the sum of total revenue and total cost does not characterize the cost but rather financial performance; average fixed costs alone do not represent total costs; and focusing solely on a single unit’s cost does not reflect the entirety of cost implications tied to production decisions.