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

PROBLEM THREE

What assumption is made concerning short-run production that causes the short-run cost curves to have their typical shapes?

PROBLEM FOUR

Why would this firm not produce 12 or less units of the its output?

Answer 1

Marginal Cost = Change in Total Cost / Change in Quantity

Or, Marginal Cost =

Average Total Cost = Total Cost / Quantity

Average variable cost = Variable Cost / Quantity

PROBLEM ONE

Total cost, Average total cost and Average fixed cost is affected by the change in fixed cost.

Variable cost, marginal cost and average variable cost remain unaffected by the change in fixed cost.

PROBLEM TWO

When variable cost changes the Total cost, Marginal cost, Average total cost, Average variable cost changes.

Only average fixed cost remains unaffected by the change in variable cost.

PROBLEM THREE

The short-run average cost curve are typically U-shaped. The assumption of fixed cost of production in the short run and the law of diminishing returns. The law of diminishing returns implies that marginal cost will rise as output increases. Eventually, rising marginal cost will lead to a rise in average total cost.

PROBLEM FOUR

Till the 12^th unit, the marginal product increases with an increase in every unit of labor. This means that the firm enjoys increasing returns at this stage.

The producer can employ more units of the labor until the 12^th unit to efficiently utilize the fixed factors. Therefore he will never produce less than 12 units.