1. The accompanying table shows three possible combinations of fi xed cost and average variable cost. For each choice, average variable cost is constant (it does not vary with the quantity of output produced).

Choice Fixed cost Average variable cost 1 $8,000 $1.00 2 12,000 0.75 3 24,000 0.25

a. For each of the three choices, calculate the average total cost of producing 12,000, 22,000, and 30,000 units. For each of these quantities, which choice results in the lowest average total cost?

b. Suppose that the fi rm, which has historically produced 12,000 units, experiences a sharp, permanent increase in demand that leads it to produce 22,000 units. Explain how its average total cost will change in the short run and in the long run.

c. Explain what the fi rm should do instead if it believes the change in demand is temporary.