From the figure you can see that when output is small, 4 cases of salsa per day or
fewer, average total cost is smaller when Selena forgoes the additional equipment and
maintains the lower fixed cost of $108: ATC 1 lies below ATC 2. For example, at 3 cases
per day, average total cost is $72 without the additional machinery and $90 with the
additional machinery. But as output increases beyond 4 cases per day, the firm’s aver-
age total cost is lower if it acquires the additional equipment, raising its fixed cost to
$216. For example, at 9 cases of salsa per day, average total cost is $120 when fixed cost
is $108 but only $78 when fixed cost is $216.
Why does average total cost change like this when fixed cost increases? When
output is low, the increase in fixed cost from the additional equipment outweighs
the reduction in variable cost from higher worker productivity—that is, there
are too few units of output over which to spread the additional fixed cost. So
if Selena plans to produce 4 or fewer cases per day, she would be better off choosing
the lower level of fixed cost, $108, to achieve a lower average total cost of produc-
tion. When planned output is high, however, she should acquire the additional
machinery.560 section 10 Behind the Supply Curve: Profit, Production, and Costs
figure 56.1
Choosing the Level of
Fixed Cost for Selena’s
Gourmet Salsas
There is a trade-off between higher fixed
cost and lower variable cost for any given
output level, and vice versa. ATC 1 is the
average total cost curve corresponding to
a fixed cost of $108; it leads to lower fixed
cost and higher variable cost. ATC 2 is the
average total cost curve corresponding to
a higher fixed cost of $216 but lower vari-
able cost. At low output levels, at 4 or
fewer cases of salsa per day, ATC 1 lies
below ATC 2 : average total cost is lower
with only $108 in fixed cost. But as output
goes up, average total cost is lower with
the higher amount of fixed cost, $216: at
more than 4 cases of salsa per day, ATC 2
lies below ATC 1.Quantity
of salsa
(cases)Average
total cost
of case
ATC 1
12
48
108
192
300
432
588
768
972
1,200High
variable
cost
$ 120
156
216
300
408
540
696
876
1,080
1,308Total
cost
$Average
total cost
of case
ATC 2
6
24
54
96
150
216
294
384
486
600Low
variable
cost
$ $222
240
270
312
366
432
510
600
702
816Total
costLow fixed cost (FC = $108) High fixed cost (FC = $216)$25020015010050Cost of caseQuantity of salsa (cases)6543210 78910High fixed costLow fixed costAt low output levels,
low fixed cost yields
lower average total cost.At high output levels,
high fixed cost yields
lower average total cost.$120.00
78.00
72.00
75.00
81.60
90.00
99.43
109.50
120.00
130.80$222.00
120.00
90.00
78.00
73.20
72.00
72.86
75.00
78.00
81.60ATC 2
ATC 1
1 2 3 4 5 6 7 8 910