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 $230. 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

Answer 1

Units of Labor	Total output	FC	VC	TC	MC	ATC	AVC	AFC
0	0	230	0	230
1	3	230	50	280	16.67	93.33	16.67	76.67
2	7	230	100	330	12.50	47.14	14.29	32.86
3	12	230	150	380	10.00	31.67	12.50	19.17
4	16	230	200	430	12.50	26.88	12.50	14.38
5	19	230	250	480	16.67	25.26	13.16	12.11
6	21	230	300	530	25.00	25.24	14.29	10.95

Given FC=230

VC=50 per labor

TC=VC+FC

MC=Change in TC/Change in output

ATC=TC/Output

AVC=VC/Output

AFC=FC/Output

When FC changes then it will change TC,AFC,ATC and MC while it will have no impact on VC and AVC