Question

Determine the following situations, and how they affect the marginal cost function of a company? (Up, Down or No effect)
1. Rise in rent

2. Rise in labor wages

3. Property tax reduction

4. Drop at the price of inventory
5. A rise in yearly insurance plan

Answer 1

The total cost is consisted of two components - Fixed cost and variable cost.

Fixed cost remains same irrespective of the level of output. Variable cost changes as the level of output changes.

So, total cost changes as variable cost changes.

The change in total cost is the marginal cost.

So, marginal cost changes when variable cost changes.

1.

Rise in rent

Rent is a fixed cost.

So, rise in rent will only impact the fixed cost.

This will have no effect on the marginal cost function.

2.

Rise in labor wages

Labor wages is a variable cost.

So, rise in labor wages will increase variable cost.

This will shift the marginal cost function upward.

3.

Property tax reduction

Property tax is a fixed cost.

So, reduction in property tax will reduce the fixed cost.

Thus, this will have no effect on marginal cost function.

4.

Drop in the price of inventory

Inventory cost is a variable cost.

So, drop in price of inventory will reduce the variable cost.

Thus, this will shift the marginal cost function downward.

5.

A rise in yearly insurance plan

The annual insurance plan is fixed cost.

So, this rise in yearly insurance plan will increase the fixed cost.

Thus, this will have no effect on the marginal cost function.