1. What happens to the difference between average total cost and average variable cost as a firm’s...

Question

1. What happens to the difference between average total cost and average variable cost as a firm’s output expands? Explain.

2. How would each of the following affect average total cost (ATC), average variable cost (AVC) and marginal cost?

an increase in the cost of the lease of the firm’s building
a reduction in the price of electricity
a reduction in wages paid to assembly line workers
an increase in the salary of the president of the firm
a reduction in the price of tags used to label the firm’s product

3. Suppose a firm is producing 1,000 units of output. Its average fixed costs are $100. Its average variable costs are $50. What is the total cost of producing 1000 units of output?

4. “There are no fixed costs in the long run.” True or false? Explain.

5. Suppose a firm is operating at the minimum point of its short-run ATC curve, so that MC=ATC. Under what circumstances would it choose to alter the size the size of its plant? Explain.

6. For which of the following types of firms would you expect diseconomies of scale (decreasing returns) to set in at relatively low levels of output? Why?

a. a copy shop

a hardware store
a dairy
an automobile manufacturer
a vodka manufacturer
a newspaper
a toy store

productionhomeworkquestion-ofsxh0xg.doc

Soma · Accepted Answer

COST OF PRODUCTION HOMEWORK QUESTIONS
1.
Average total cost can be obtained when we divide the total cost by output.  The curve is U shaped, first comes down, reaches to minimum and then goes up. Average variable cost can be calculated by dividing total variable cost divided by output. 
TC = TFC +TVC
 Dividing both sides by Q, we get
TC/Q= TFC/Q+TVC/Q
ATC= AFC+AVC
ATC-AVC=AFC 
The difference between ATC and AVC is nothing but average fixed cost. 
As the firm expands the output Q, AFC decreases. 
But AFC can never be zero or never touch the output axis because total fixed cost can never zero. Even with zero level of output, there is positive fixed cost. 
With the expansion of output, AFC falls but it can never be zero. 
#2 
a. lease cost is the fixed cost. Thus, an increase in the lease cost of the building will increase the fixed cost there by total cost. This average total cost will increase but AVC and MC will remain the same. 
b.  price of electricity is a variable cost. It will decrease total variable cost and subsequently decrease the average variable cost for a particular level of output.  Lower the AVC, lower will be ATC. Since total variable cost has decreased, it will also decrease the marginal cost. Thus ATC, AVC and MC will all decrease with the reduction in the price of electricity. 
c. Wages is also a cost of production and a variable cost. A reduction in wage will   cause the AVC as well as ATC to fall. Since total variable cost has come down, MC will also fall. Thus, reduction in wage will lead to reduce AVC, ATC and MC to fall. 
d. Salary of the president is a variable cost. Any increase in the salary will increase total variable cost and also the total cost. Since total variable cost has increased with the increase of president’s salary, the marginal cost of then firm will also rise.  Hence ATC,

1. What happens to the difference between average total cost and average variable cost as a firm’s output expands? Explain. 2. How would each of the following affect average total cost (ATC), average...

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