Question

Part B Short Answer questions (14 points) Q.1 Consider the following graph which shows the cost curves of a firm. MC YO NGS ATC AVC Q, QQ, Q QQ (a) is the firm operating in short run or long run? Explain () Is the gap between ATC and AVC increasing or decreasing over quantity? Explain. (c) Suppose wages increase, does AFC increase or not? Explain. (Suppose rental payment increases, does MC increase or not? Explain. ) On a separate graph, draw the TC, TVC and TFC, Indicate the quantity that the TC starts to get steeper and steeper Page 2 of 4 Q.2 Complete the following table Quantit TC TFC TVC MC S25 S75 0 1 2 3 4 $40 $125 SI SO 5 S15

Answer 1

As per Chegg policy and guideline, the first-four parts are answered below:

Q1.

a.

Answer: short run

If it is in the long-run there must not be any gap between ATC and AVC, because this gap is due to AFC that can’t be there in the long-run.

b.

Answer: decreasing

The gap is decreasing as quantity increases from left to right direction.

c.

Answer: no

Wage is a labor cost, which is variable in nature – the increase in each unit of production increases labor cost.

d.

Answer: yes

Rent is a fixed cost. Total cost (TC) is the aggregate of fixed cost and variable cost. Marginal cost (MC) is the difference of total cost in two consecutive units. Since TC increases because of rent, MC would also be increased.