CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

If the average cost of producing 9 sweaters is $6.50 and the marginal cost of producing the 10th sweater is $6.75, then the average cost of producing 10 sweaters will ______.
A. increase
B. decrease
C. increase by 25 cents
Explanation: If marginal cost is greater than average cost, then average cost will increase. In this case, average variable cost will equal $6.53 after the 10th sweater is produced.

User Contributed Comments 6

User Comment
sivenkova Why "increase by 25 cents" is not correct?
dimanyc Because it will increase by 0.03 cents, not 0.25
Poorvi Better explained -> because it increases by 0.025 cents and not 0.25 cents. I made the same mistake, getting the average cost as 6.525, I just checked option with 0.25 cents as the answer.
azramirza From where do we get 0.03?
Mariecfa 9 sweaters X $6.50 = $58.50
$58.50 + $6.75(10th Sweater)=$65.25
$65.25/10 Sweaters = $6.525
$6.525-$6.50=$0.025 round to $0.03
bidisha Marginal cost PULLS the average cost towards itself.
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