What term describes the amount a firm spends to produce one unit of output, calculated by dividing total costs by quantity?

• A. Average Cost
• B. Average Revenue
• C. Contribution
• D. Fixed Costs

Answer: (A)

Unit cost shows how much each unit costs to produce on average. It is found by dividing total costs by the quantity produced, so the term describing this is average cost. This figure combines fixed costs and variable costs into a per-unit amount. As output increases, fixed costs are spread over more units, reducing the average cost contributed by fixed costs, while variable costs change with production. Knowing the average cost per unit helps with pricing decisions and evaluating profitability at different output levels. The other terms refer to different concepts: average revenue is revenue per unit, not cost; contribution is price minus variable cost per unit; fixed costs are costs that do not vary with output.