Question

A camera company has enough capacity to produce 20,000 cameras per year for mobile phones. This year it is producing 10,000 cameras and is planning to produce 15,000 next year. How would the unit and total manufacturing costs change if this plan is implemented, other things being equal?

Answer 1

(I) Unit costs

Unit variable cost is assumed to remain unchanged, so AVC will be the same.

Since higher production remains within capacity, total fixed costs (TFC) will be unchanged, so average fixed cost (AFC) will decrease.

Lower AFC and unchanged AVC will mean average total cost (ATC) will decrease.

(II) Total costs

TFC will stay the same.

As AVC is unchanged, higher production will incraese total variable cost (TVC).

Since TVC will rise and TFC is the same, total cost (TC) will increase.