Microeconomics Unit 7 Discussion

Question Suppose a business experiences a sudden increase in its fixed costs. For example, suppose property taxes increase dramatically. What impact, if any, will this have the firms AFC (average fixed cost), AVC (average variable cost), ATC (average total cost) and MC (marginal cost) and therefore these cost curves Why Solution AFC (average fixed cost) Average fixed cost shall be increased with the increase in fixed cost, for example 10 units has fixed cost of 40 the average fixed cost shall be 40/10 4 and if fixed cost increased to 50 the average fixed cost shall be 50/10 5. Similarly the rectangular hyperbola of AFC curve shall shift outward to reflect the above phenomenon. AVC (average variable cost) There will be no vary in average variable cost similarly Average Variable Cost curve shall remain the same. ATC (average total cost) The average total cost shall be increased with the increase in fixed cost, for example 10 units has fixed cost of 50 and variable cost of 50 so the average total cost shall be 100/10 10 and if fixed cost raised to 60 the average total cost shall be 110/10 11. Same the U shape ATC curve shall shift upward