Question

Suppose that the rent that a firm pays on the building that it leases decreases. How would this affect this firm's marginal, average, and average variable cost curves?

Select one:

a. ATC decreases, but MC and AVC are unchanged.

b. MC, AVC, and ATC increase.

c. MC, AVC, and ATC decrease.

d. ATC increases, but not MC or AVC.

e. None of the above.

Answer 1

As when the rent of the building which the firm leases is the fixed cost of the firm and when the rent decreases this means that the total fixed cost decreases and when total fixed cost decreases then total cost and average fixed cost will also decrease.

But the total variallvle cost which is directly proportional to the quantity demand will not decrease. Hence average variable cost will also not decrease. It will remain as early it was.

And MC os marginal cost which is independent of fixed cost. It depends on total variable cost. And when total variable cost remains same then the MC will also remain same.

Hence, option A is correct.