Question

_{COST OF PRODUCTION HOMEWORK QUESTIONS PLEASE ANSWER ALL QUESTIONS AND PARTS}

1. _{What happens to the difference between average total cost and average variable cost as a firm’s output expands?  Explain.}

2. _{How would each of the following affect average total cost (ATC), average variable cost (AVC) and marginal cost?}

1. _{an increase in the cost of the lease of the firm’s building}
2. _{a reduction in the price of electricity}
3. _{a reduction in wages paid to assembly line workers}
4. _{an increase in the salary of the president of the firm}
5. _{a reduction in the price of tags used to label the firm’s product}

3. _{Suppose a firm is producing 1,000 units of output.  Its average fixed costs are $100.  Its average variable costs are $50.  What is the total cost of producing 1000 units of output?}

4. _{“There are no fixed costs in the long run.”  True or false?  Explain.}

5. _{Suppose a firm is operating at the minimum point of its short-run ATC curve, so that MC=ATC.  Under what circumstances would it choose to alter the size the size of its plant? Explain.}

6. _{For which of the following types of firms would you expect diseconomies of scale (decreasing returns) to set in at relatively low levels of output?  Why?}

1. _{a copy shop}

2. _{a hardware store}
3. _{a dairy}
4. _{an automobile manufacturer}
5. _{a vodka manufacturer}
6. _{a newspaper}
7. _{a toy store}

Answer 1

Difference between the ATC and AVC is AFC because ATC=AFC+AVC

AFC is TFC/Q where TFC is Fixed. Thus when quantity increases keeping TFC is fixed, then AFC will decrease.

A) An increase in the cost of the lease of the firms building, will increase TFC, AFC and ATC but AVC and MC will not change

b)A reduction in price of electricity will reduce the variable cost and thus decreases MC, AVC and ATC. But AFC remains same

c)A reduction in wage will reduce AVC, MC and ATC but AFC remains same

d)An increase in salary of president will increase AFC and ATC. But AVC and MC remains same.

e)A reduction in price tag will reduce AVC, MC and ATC but AFC remains same