Question

Indicate how the location of each of the following curves would be altered if (1) total fixed cost increases and (2) total variable cost decreases at each level of output. Curve Change when TFC Increases Change when TVC Decreases (

AFC
AVC
ATC
MC

Answer 1

The location of each cost curve is altered when total fixed cost increases and total variable cost decreases at each level of output.

Step-by-step explanation:

The location of each cost curve is altered when total fixed cost increases and total variable cost decreases at each level of output. Let's see how each curve changes:

1. Average Fixed Cost (AFC): AFC curve does not change because it is based on fixed costs only, and those costs remain the same regardless of changes in output.
2. Average Variable Cost (AVC): AVC curve shifts downward when total variable cost decreases, because lower variable costs per unit of output result in a lower AVC.
3. Average Total Cost (ATC): ATC curve also shifts downward when total variable cost decreases, because a decrease in AVC pulls down the ATC curve.
4. Marginally Cost (MC): The MC curve is not affected by changes in fixed or variable costs, as it represents the change in total cost resulting from a change in output.

Answer 2

Cost curves are affected differently by changes in TFC and TVC. AFC increases with higher TFC but is unaffected by changes in TVC. AVC and ATC decrease with lower TVC, while ATC also increases with higher TFC. MC does not change with TFC but decreases with lower TVC.

Step-by-step explanation:

We are considering how the location of cost curves changes when total fixed cost (TFC) increases and when total variable cost (TVC) decreases at each level of output. These cost curves include average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC).

Impact on Cost Curves:

• AFC: When TFC increases, the AFC curve shifts upward because fixed costs are spread over the same quantity of output, thus increasing the cost per unit. If TVC decreases, AFC remains unchanged since it does not depend on variable costs.
• AVC: A decrease in TVC results in the AVC curve shifting downward, as there is a lower variable cost per unit. An increase in TFC does not affect AVC because AVC is solely dependent on variable costs.
• ATC: When TFC increases, the ATC curve shifts upward since the additional fixed cost raises the total cost per unit. Conversely, a decrease in TVC causes the ATC curve to shift downward, as the total cost per unit drops.
• MC: MC is not directly affected by an increase in TFC as it is the cost of producing one more unit of output. If the additional units have lower variable costs, then MC would decrease, as it's the derivative of the TVC curve.

These effects on cost curves are crucial for businesses in making production and pricing decisions. Understanding the intersection points where MR=MC and price interactions with AVC can indicate whether a firm should continue production or shut down.