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Problem 1
Advanced Electronics (AE) is a computer chip manufacturer. It has monthly fixed costs of $4,000,000. Its marginal costs are $1.00 per chip.
Hint: Here Marginal Cost (MC) is constant, which implies that Average Variable Cost (AVC) is constant and equals MC. This does not imply Average Total Cost (ATC) is constant or has to equal MC. Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC). Divide through by the quantity Q, which implies TC/Q = FC/Q + VC/Q. This gives us ATC = AFC + AVC.
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