Question

If a variable cost (petrol) price drops what will happen to the ATC, MC, AVC, AFC....

If a variable cost (petrol) price drops what will happen to the ATC, MC, AVC, AFC. Explain the impact of price change on this cost category and total and average cost. Please explain using economy terms.

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Homework Answers

Answer #1

ATC : will decrease

Explanation:

Average total cost =total cost /quantity. And total cost =variable cost+fixed cost. So when there is drop in variable cost, total cost will decrease. So, when total cost decrease, average total cost is also decrease.

MC = decrease

Explanation :

Marginal cost =change in total cost /change in quantity

So, here as we see in ATC, total cost will decrease so, MC cost will also decrease.

AVC = decrease.

Explanation :

Average Variable Cost =Variable cost /Quantity.

So, when variable cost drops, AVC will also drop.

AFC= unchanged

Explanation :

AFC=fixed cost /quantity. Fixed cost is totally different than variable cost. So when there is change in variable cost, there is no change in fixed cost.

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