Question

•If you run a small courier company as the subcontractor for Australia post, use the cost curves to daw a graph which component of your costs will be affected by the petrol price drop.

•Identify the type of cost petrol is for the company (variable/fixed cost), and explain the impact of price change on this cost category and total and average cost.

•Draw initial cost curves (ATC, AVC, AFC and MC).

Show the change of those curves as a result of the petrol price change,

Answer 1

There are two types of cost, one is fixed cost other is variable cost. Fixed cost remains the same at all level of output while variable cost tends to change with the level of output. Cost of petrol will be variable cost for courier company because cost of petrol tends to raise as you get more orders to deliver parcels.

Rise in variable cost shifts Average variable cost, average total cost and marginal cost curve upward while it does not have any impact on average fixed cost.

We will have a detailed comparison on which curve shift upward or downward:

TVC 1 / TC1 is te new cost curve while TVC / TC were existing one.

Output	TC	TFC	TVC	TVC 1	TC 1	ATC	AFC	AVC	MC	ATC 1	AFC 1	AVC 1	MC 1
0	81	81	0	0	81
1	96	81	15	25	106	96	81	15	15	106.0	81.0	25.0	25
2	110	81	29	41	122	55	40.5	14.5	14	61.0	20.3	20.5	16
3	123	81	42	56	137	41	27	14	13	45.7	9.0	18.7	15
4	141	81	60	76	157	35.25	20.25	15	18	39.3	5.1	25.0	20
5	166	81	85	103	184	33.2	16.2	15	25	36.8	3.2	25.0	27
6	201	81	120	140	221	33.5	13.5	15	35	36.8	2.3	25.0	37
7	251	81	170	192	273	35.85	11.57	15	50	39.0	1.7	25.0	52
8	321	81	240	280	361	40.13	10.125	15	70	45.1	1.3	25.0	88

Average total cost curve shift upward.

Marginal cost curve shft upward

There is no change in average fixed cost curve

Average variable cost shifts upwards.