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 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 $230. 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

Units of Labor	Total output	FC	VC	TC	MC	ATC	AVC	AFC
0	0	230	0	230
1	3	230	55	285	18.33	95.00	18.33	76.67
2	7	230	110	340	13.75	48.57	15.71	32.86
3	12	230	165	395	11.00	32.92	13.75	19.17
4	16	230	220	450	13.75	28.13	13.75	14.38
5	19	230	275	505	18.33	26.58	14.47	12.11
6	21	230	330	560	27.50	26.67	15.71	10.95

Given FC=230

VC=55 per labor

TC=VC+FC

MC=Change in TC/Change in output

ATC=TC/Output

AVC=VC/Output

AFC=FC/Output

When the cost of variable cost increases then all the other costs will change as the variable cost will change the TC which will affect MC,ATC,AVC Where as AFC will not change as it is based on fixed costs.