Question

1. Joe owns a firm with a conventional production function resulting in U-shaped ATC, AVC, and MC curves. Suppose that petroleum energy is a major component of the variable costs for Joe’s firm.

1. Graphically depict, with proper labels, the AFC₀, AVC₀, ATC₀, and MC₀ curves for this firm.
   
2. Recent events in the energy arena have caused oil prices to fall significantly. Graphically depict the impact of these lower oil prices on each of the 4 cost curves mentioned in part (a). You should use a copy of the graph you created in (a) above so that you should the new position of the four curves, AFC₁, AVC₁, ATC₁, and MC₁, relative to the original curves from (a) when oil was more expensive.
   
3. Independent of your answer to (b) above, would a permanent increase in shipping costs per barrel of oil impact the firm’s Fixed Costs or its Variable Costs? Explain. (You can answer this without a graph if you wish.)

SO CONFUSED!

Answer 1

a)

b) A decrease in the price of input( i.e. oil) will decrease the cost. Thus all curves will shift downward such that their shape will remain same.

let original curves be MC', ATC', AVC'

and after reduction in price curves be MC, ATC, AVC.

c) A permanent increase in shipping cost per barrel cost will increase the cost of production. Also, it is a variable factor of production. Thus both the variable and the fixed cost will increase.