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A firm uses two inputs in production: capital and labour. In the short run, the firm...

A firm uses two inputs in production: capital and labour. In the short run, the firm cannot adjust the amount of capital it is using, but it can adjust the size of its workforce. What happens to the firm’s average-total-cost curve, the average-variable-cost curve, and the marginal-cost curve when the cost of renting capital increases?

The average-total-cost curve (shifts up/shifts down/do not change) .

The average-variable-cost curve   (shifts up/shifts down/do not change)  .

The marginal-cost curve  (shifts up/shifts down/do not change)   .

What happens to the firm’s average-total-cost curve, the average-variable-cost curve, and the marginal-cost curve when the cost of hiring labour increases?

The average-total-cost curve  (shifts up/shifts down/do not change)   .

The average-variable-cost curve  (shifts up/shifts down/do not change)  .

The marginal-cost curve  (shifts up/shifts down/do not change)   .

Solutions

Expert Solution

Question 1

In short-run, capital is the fixed factor and the labor is the variable factor.

The cost of renting capital is the fixed cost and the cost of hiring labor is the variable cost.

Total cost is sum total of total fixed cost and total variable cost.

So, change in rental cost of capital or wage rate of labor will impact the total cost.

However, change in rental cost of capital will have no impact on variable cost and marginal cost.

On the other hand, change in wage rate of labor will have impact on variable cost and marginal cost.

Thus,

When the cost of renting capital increases,

The average total cost curve shifts up.

The average variable cost curve do not change.

The marginal cost curve do not change.

Question 2

In short-run, capital is the fixed factor and the labor is the variable factor.

The cost of renting capital is the fixed cost and the cost of hiring labor is the variable cost.

Total cost is sum total of total fixed cost and total variable cost.

So, change in rental cost of capital or wage rate of labor will impact the total cost.

However, change in rental cost of capital will have no impact on variable cost and marginal cost.

On the other hand, change in wage rate of labor will have impact on variable cost and marginal cost.

Thus,

When the cost of hiring labor increases,

The average total cost curve shifts up.

The average variable cost curve shifts up.

The marginal cost curve shifts up.

Rahul Sunny answered 1 year ago
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