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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.

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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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