Question

1. Fixed Costs and Variable Costs. Choose an industry. (a) Over a 1-year period, which costs in that industry are generally fixed? Which are variable? (b) Consider the marginal cost. Would the marginal cost be higher, lower, or the same if the production were increased slightly? Why do you think that?

Answer 1

a) For a 1 year period, the Fixed cost of the industry is Machinery, Land, Buildings, Patents etc.

The variable cost for the industry will be wages paid to labor, electricity expenses, and other expenses which the firm pays for the factors of production.

b) MArginals cost of the firm is the cost involved in the production of an extra unit. For example, if the firm is producing 100 units of goods and incurring a cost of $100 if they produce 110 and incur a cost of $110 then the marginal cost of producing one extra unit is $1.

c) If the production is increased the marginal cost will increase too but at a slower rate. Initially, the MArginal cost will fall because at first, the labor can utilise fewer resources to produce more output but if they go on increasing production the firm will be employing more and more resources for extra production and the marginal cost will rise.