Question

2. Suppose that a firm can decrease the rate at which its variable cost increases by paying a larger fixed cost up front. Plot the two fixed cost curves in one diagram. Plot the two average fixed cost curves in a second diagram. Plot the two variable cost curves in a third diagram. Plot the two average cost curves in a final diagram. Explain why this kind of technological change may explain why large chain stores like WalMart and Costco have driven many small mom and pop stores out of business.

Answer 1

Here we make how a technological change increases the Total Fixed Cost(TFC) but reduces our per unit Total Variable Cost(TVC). Now with reference to big chains we can explain this advantage to them with respect to small stores. TFC remains same for all levels of production but TVC increases at a decreasing rate which can be further lowered with this increase in TFC and this rise in TVC at increasing rates at later level of production which when compared with TFC makes TFC very little or rather ignorable because ATC might increase but with comparison with level of production and TVC and ATC will still remain almost negligible. This makes the firms over discounts on products over the listed price but still make larger levels of profit than those small firms. With both economies of scale and reduction in AVC and TVC more quantities can be sold at the older price and much more at a lower price with offers and discounts which might bring utility to buyers compared to earlier price levels but would still result in large level of profits for such big chains while small firms are not able to sell those goods at such lower levels because of higher cost to break even. All this is evident from the diagrams above.

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