Question

Costs are very important not only to us as individual consumers, but also to businesses who must control costs in make the desired profit. We should have learned that in this chapter (if we did not already know that). In this discussion answer the following questions (and support your answer(s) What can cause a firm's cost curves to shift up or down? How would a shift of the cost curves affect a firm's profits?

Answer 1

The cost curves primarily the average total cost curve, average variable cost curve and marginal cost curve shift up when there is an imposition of a specific tax. Only average cost curve shifts up in case of lump sum tax. When there are specific subsidies, these cost curves shift down.

Also, when there is an increase in wage rate, rental price of capital or in the cost of any other input, both the average and marginal cost curves shift up. When there is an increase in the fixed cost such as an increase in lease payment, the average total cost curve shifts up but there is no change in average variable cost curve and marginal cost curve.

When there is an increase in cost, profits fall. When there is a decline, profits rise.