Costconcept.docx
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- Words: 692
- Pages: 5
Ans 1
Quantity
Total Cost (TC)
Total Fixed Cost (TFC)
Total Variable Cost (TVC)
Average Cost (AC)
Average Fixed Cost (AFC)
Average Variable Cost (AVC)
Marginal Cost (MC)
0
120
120
0
``--``-
---
---
---
1 2 3 4 5 6 7 8 9 10
265 384 483 568 645 720 799 888 993 1120
120 120 120 120 120 120 120 120 120 120
145 264 363 448 525 525 679 768 873 1000
265D 192I 161C 142T 129 120 114 111 110 112
120 60 40 30 24 20 17 15 13 12
145 132 121 112 105 88 97 96 97 100
145 119 99 85 77 75 79 89 105 127
Ans 5 a. False. In most economic decisions only those costs and revenues which are affected or report a change need to be analyzed. Raw material costs may or may not be a part of the change. If they are then the change needs to be estimated, and revalued at beliefs of future price, to arrive at net benefit of the business decision. If they are not, ie Raw Material Costs are not affected by the plan, then the business maker need not. b. True. This is also known as Second order Condition for profit maximization. Marginal cost below the the average variable costs, (then the Average Variable Cost would be greater than MC for last unit and equal to MC for this unit), ‘pulls’ AC and AVC downwards. Conversely, marginal cost above the average cost then the average cost pulls the AVC upwards.
Minimum Q*
c. True. The firm is experiencing constant returns to scale.
d. True. To stay put in long run, the firm would look at LRAC and where it stands with respect to Price. Whereas a firm in the short run can stay running at MC = P at or above minimum of AVC (the point where the two curves intersect). This could mean however, that firms would be operating below AC, and foregoing Fixed or Depreciation costs. Which makes short run supply curve the MC curve above AVC. There is an opportunity cost of staying in Business. No firm would be foregoing Fixed costs in Long term supply curve. Long Term Supply curve would thus be the curve of LRMC above LRAC.
e. False. Only in Long Run and Pure Competition where there are entrants who are perfectly efficient, zero frictional costs of transaction or search etc., firms experience a Demand like a horizontal price bar. When that happens, in the long run the equilibrium price will intersect LRAC and LRMC at minimum LRAC. Obviously to stay in business, the firm has to continuously try to cut wastage including over production to stay at minimum LRAC. Else a firm could incur economic profits at a price of intersection above intersection of LRMC and LRAC.
6. a. Rental Costs are Fixed costs: They do not vary with quantity produced. AVC curve remains same. AC costs is lowered, shifts right.
b. Effect on AVC: Same. With change in quantity, AFC curve remains same, AC remains same.
AVC & AC remain same. Quanity truncated. 340
290
Quantity
ഥ 𝑷 240
190
140
90 25
35
45
55 new Q**
65 Q* old qty.
75
Price
c. Both AVC and AC shift left (increase in average costs w.r.t same Quantity).
AVC & AC both shift left. 320
Quantity
270
220
AVC1 AVC2
170
AC2 AC1
120
70 25
35
45
55
65
75
Price
d. The AVC and AC will not shift, just extend upwards from the point of quota truncation.
ഥ 𝐏
Q* with Quota
Q** quota removed
e. Imposition of stricter laws may be in form of a per unit Tax / (Or, Variable Filtration costs) such as carbon Tax. The AVC and AC might shift left (Over relevant increasing portions), or alternatively continue unaltered till a certain quantity and then turn left. If no Tax/ Costs are imposed, no change is observed.
AVC & AC shift left in imposition of Quantity linked Taxes. . 340
Quantity
290 240
AC1 AVC2
190
AC2 140
AVC1
90 25
35
45
55
Price
65
75
Quantity
Total Cost (TC)
Total Fixed Cost (TFC)
Total Variable Cost (TVC)
Average Cost (AC)
Average Fixed Cost (AFC)
Average Variable Cost (AVC)
Marginal Cost (MC)
0
120
120
0
``--``-
---
---
---
1 2 3 4 5 6 7 8 9 10
265 384 483 568 645 720 799 888 993 1120
120 120 120 120 120 120 120 120 120 120
145 264 363 448 525 525 679 768 873 1000
265D 192I 161C 142T 129 120 114 111 110 112
120 60 40 30 24 20 17 15 13 12
145 132 121 112 105 88 97 96 97 100
145 119 99 85 77 75 79 89 105 127
Ans 5 a. False. In most economic decisions only those costs and revenues which are affected or report a change need to be analyzed. Raw material costs may or may not be a part of the change. If they are then the change needs to be estimated, and revalued at beliefs of future price, to arrive at net benefit of the business decision. If they are not, ie Raw Material Costs are not affected by the plan, then the business maker need not. b. True. This is also known as Second order Condition for profit maximization. Marginal cost below the the average variable costs, (then the Average Variable Cost would be greater than MC for last unit and equal to MC for this unit), ‘pulls’ AC and AVC downwards. Conversely, marginal cost above the average cost then the average cost pulls the AVC upwards.
Minimum Q*
c. True. The firm is experiencing constant returns to scale.
d. True. To stay put in long run, the firm would look at LRAC and where it stands with respect to Price. Whereas a firm in the short run can stay running at MC = P at or above minimum of AVC (the point where the two curves intersect). This could mean however, that firms would be operating below AC, and foregoing Fixed or Depreciation costs. Which makes short run supply curve the MC curve above AVC. There is an opportunity cost of staying in Business. No firm would be foregoing Fixed costs in Long term supply curve. Long Term Supply curve would thus be the curve of LRMC above LRAC.
e. False. Only in Long Run and Pure Competition where there are entrants who are perfectly efficient, zero frictional costs of transaction or search etc., firms experience a Demand like a horizontal price bar. When that happens, in the long run the equilibrium price will intersect LRAC and LRMC at minimum LRAC. Obviously to stay in business, the firm has to continuously try to cut wastage including over production to stay at minimum LRAC. Else a firm could incur economic profits at a price of intersection above intersection of LRMC and LRAC.
6. a. Rental Costs are Fixed costs: They do not vary with quantity produced. AVC curve remains same. AC costs is lowered, shifts right.
b. Effect on AVC: Same. With change in quantity, AFC curve remains same, AC remains same.
AVC & AC remain same. Quanity truncated. 340
290
Quantity
ഥ 𝑷 240
190
140
90 25
35
45
55 new Q**
65 Q* old qty.
75
Price
c. Both AVC and AC shift left (increase in average costs w.r.t same Quantity).
AVC & AC both shift left. 320
Quantity
270
220
AVC1 AVC2
170
AC2 AC1
120
70 25
35
45
55
65
75
Price
d. The AVC and AC will not shift, just extend upwards from the point of quota truncation.
ഥ 𝐏
Q* with Quota
Q** quota removed
e. Imposition of stricter laws may be in form of a per unit Tax / (Or, Variable Filtration costs) such as carbon Tax. The AVC and AC might shift left (Over relevant increasing portions), or alternatively continue unaltered till a certain quantity and then turn left. If no Tax/ Costs are imposed, no change is observed.
AVC & AC shift left in imposition of Quantity linked Taxes. . 340
Quantity
290 240
AC1 AVC2
190
AC2 140
AVC1
90 25
35
45
55
Price
65
75
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