Question

We have been using the same set of data (Data Set One) in the notes to illustrate production and costs. I have provided Data Set One in both tables below. When costs were calculated in the notes, fixed costs were $200. By using the term fixed costs economists are only referring to the fact that a firm must pay this expense no matter how much output it produces or sells. An example of a fixed cost could be the rent a small store pays on the space it rents. The rent will be the same for the duration of the lease, no matter if the store sells I item or 500 items. It is helpful to know what will happen to costs if the price of the variable or fixed resource changes.

PROBLEM ONE - Using the information in data set one, which I have included in the table below, recalculate total cost, fixed cost, variable cost, marginal cost, average total cost, average variable cost and average fixed costs if the price of the fixed input (the small stores rent) is not $200 but $220. A new lease may have caused the rent to increase. I have created Table 1 for you to put your answers in. Assume the price of the variable input, labor, is still $50 per unit. When fixed costs change which other costs will increase? Compare the costs you calculate for table one to the costs calculated in the notes in chapter 7 to find the answer.

TABLE ONE FOR ANSWERS TO PROBLEM ONE

Units of Labor	Total Product (output)	FC	VC	TC	MC	ATC	AVC	AFC
0	0
1	3
2	7
3	12
4	16
5	19
6	21

Problem Two - Using the information in data set one, which I have included in the table below, recalculate total cost, fixed cost, variable cost, marginal cost, average total cost, average variable cost and average fixed costs if the price of the variable input (which is labor in this example) is not $50 but $55. I have created Table 2 for you to put your answers in. Assume that fixed costs remain at $220. When the price of a variable input changes which other costs will increase? Compare the costs you calculate for table two to the costs calculated in table one to find your answers.

TABLE TWO FOR ANSWERS TO PROBLEM TWO

Units of Labor	Total Product (output)	FC	VC	TC	MC	ATC	AVC	AFC
0	0
1	3
2	7
3	12
4	16
5	19
6	21

Answer 1

1.

Labour	TP	FC	VC	TC	MC	ATC	AVC	AFC
0	0	220	0	220	nil	nil	nil	nil
1	3	220	50	270	16.67	90	16.67	73.33
2	7	220	100	320	12.5	45.71	14.29	31.43
3	12	220	150	370	10	30.83	12.50	18.33
4	16	220	200	420	12.5	26.25	12.50	13.75
5	19	220	250	470	16.67	24.74	13.16	11.58
6	21	220	300	520	25	24.76	14.29	10.48

TC = FC + VC.

MC = change in TC/change TP.

AVC = VC/TP.

ATC = TC/TP.

AFC = FC/TP.

2.

Labour	TP	FC	VC	TC	MC	ATC	AVC	AFC
0	0	220	0	220	nil	nil	nil	nil
1	3	220	55	275	18.33	91.67	18.33	73.33
2	7	220	110	330	13.75	47.14	15.71	31.43
3	12	220	165	385	11	32.08	13.75	18.33
4	16	220	220	440	13.75	27.50	13.75	13.75
5	19	220	275	495	18.33	26.05	14.47	11.58
6	21	220	330	550	27.5	26.19	15.71	10.48

AFC, and FC would not change.

Rest all other costs, would be affected becuase of change in variable cost.