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input substituition

Explain why a change in a firm's total fixed cost of production will shift its average total cost curve, but not its marginal cost curve.

Provide two example of input substituition.

Solution Preview

The simplest way to see why changes in a firm's total fixed cost of production shifts average total cost curve but not the marginal cost curve is to look at their definitions.

ATC = Total Cost / Quantity = (Total Fixed Cost + Total Variable Cost)/Quantity = (Total Fixed Cost / Quantity) + (Total Variable Cost / Quantity)

MC = Change in Total Cost / Change in Quantity = (Change in Total Fixed Cost + Change in Total Variable Cost)/Change in Quantity

As output increases the fixed cost is still fixed, and there is no change in total fixed cost. Thus the equation becomes

MC = Change in Total Cost / Change in Quantity = (Change in Total Fixed Cost / Change in Quantity) + (Change in Total Variable Cost / Change in Quantity) = 0 + (Change in Total Variable Cost / Change in Quantity) = (Change in Total Variable Cost / Change in Quantity)

Thus fixed cost ...

Solution Summary

The input substituition is examined.

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