With fixed costs of Rs. 400, a firm has average total costs of Rs. 3 and average variable costs of Rs. 2.50. Its output is

[amp_mcq option1=”200 units” option2=”400 units” option3=”800 units” option4=”1,600 units” correct=”option2″]

The correct answer is B. 400 units.

Average total cost (ATC) is total cost (TC) divided by output (Q). In this case, ATC = 3 = TC/Q. We know that fixed costs (FC) are 400, so variable costs (VC) are TC – FC = 3Q – 400. We also know that AVC = VC/Q = 2.50. Substituting this into the equation for TC, we get 3Q – 400 = 2.50Q. Solving for Q, we get Q = 400 units.

Option A is incorrect because it is the average variable cost, not the average total cost. Option C is incorrect because it is twice the average total cost, which would mean that the firm is not covering its fixed costs. Option D is incorrect because it is four times the average total cost, which would mean that the firm is making a very large profit.