Question

Draw a diagram illustrating the marginal cost, average variable cost, and average fixed cost curves for a firm. Suppose there is a decrease in weekly wages paid by the firm. On your diagram demonstrate the impact of this event on these cost curves.

Answer 1

Before the decrease in wages

After the decrease in wages

With a decrease in wages, the marginal costs will fall, i.e each additional worker will cost lesser than previous. The Average variable cost will fall as well, as the total variable cost will fall, wages being a part of it. The Average fixed cost will remain unchanged as wages are not a part of fixed cost.

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