1. Suppose a firm decreases the wages to all their workers. Assume all other costs remain...

1. Suppose a firm decreases the wages to all their workers. Assume all other costs remain the same. (5 pts.)

a. Will short-run average fixed costs increase, decrease, or remain the same? Or is the change unknown?

b. Will short-run average variable costs increase, decrease, or remain the same? Or is the change unknown?

c. Will short-run variable costs increase, decrease, or remain the same? Or is the change unknown?

d. Will short-run total costs increase, decrease, or remain the same? Or is the change unknown?

e. Will short-run marginal costs increase, decrease, or remain the same? Or is the change unknown?

Solutions

Expert Solution

A- Since wages are not part of the fixed cost, they are the variable costs, hence the changes in the wages will not result in any change in the total or average fixed cost.

Hence the average fixed costs will remain unchanged.

B- Since the wages are the variable costs , the decrease in the wages will cause decrease in the TOTAL variable cost , and when the total variable cost will decrease then the average variable cost will also decrease with the increasing level of output.

Hence the short run average variable cost will decrease.

C - The short run variable costs will decrease because of the wages being a part of the variable costs.

D - Total cost comprises of the FIXED COST and VARIABLE COST. Due to the decrease in the wages the variable costs will decrease and hence when the total fixed cost will be added to the decreased variable cost, the Total costs will also decrease.

Hence the short run total costs will decrease.

E - The marginal costs will decrease with the decrease in the wages of the labors.

Rahul Sunny answered 1 year ago

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