Question

Q1 a. What is the real opportunity cost of putting an unemployed laborer to work raking leaves or digging holes and refilling them during a serious recession like the one the whole world is fearing now because of Covid-19? b. Indicate whether the inputs below are variable(V) or fixed(F) in the short run Input Output meat hamburgers Fire Insurance in dry cleaning Tires in automobiles Property Tax in textile Production Gasoline trucking services Depreciation in aircraft production c. 'If average variable cost (AVC) is increasing with output, then average total cost (ATC) must also be increasing with the output' Explain and illustrate.

Answer 1

1.a. Opportunity cost is second best alternative foregone. Jobs genertaed to provide employment by state has an opportunity cost.

In this case it would be money spent on infrastructure raising projects as state is paying wages and not investing in long term asset building.

b.

Fixed costs are costs incurred even when there is no output. example-rent, insurance. Variable cost is a cost changing with output. Eg. Raw material cost

meat in hamburgers: Variable cost

fire insurance in dry cleaning: Fixed cost

tires in automobiles: Variable cost

property tax in textile production: Fixed cost

gasoline in trucking services: Variable cost

depreciation in aircraft production: Fixed cost.

c.Average total cost is sum of average fixed cost and average variable cost.

hence as average variable cost increases, average total cost also increases with output.