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Fixed Cost & Effect of Output Increase/Decrease

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The IT and finance departments of a firm report the values in the following table. The firm produces 20 units of output.

Average Total Cost=30 Average Variable Cost=20 Marginal Cost=27 Price=23 Marginal Revenue=18
a. What is total fixed cost?
b. What happens to profit if output increases slightly?
i. Increase
ii. Decrease
iii. Remain constant
iv. Impossible to tell

c. What happens to average total cost if output increases slightly?
i. Increase
ii. Decrease
iii. Remain constant
iv. Impossible to tell

d. What happens to average variable cost if output increases slightly?
i. Increase
ii. Decrease
iii. Remain constant
iv. Impossible to tell

e. What happens to marginal cost if output increases slightly?
i. Increase
ii. Decrease
iii. Remain constant
iv. Impossible to tell

f. What happens to profit if the firm shuts down in the short run and reduces output to zero?
i. Increase
ii. Decrease
iii. Remain constant
iv. Impossible to tell

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Solution Preview

a. What is total fixed cost?
In the question, ATC=30, AVC=20, MC=27, P=23, MR=18
Total fixed cost = (ATC-AVC)*Q = (30-20)*20 = 10*20=200

b. What happens to profit if output increases slightly?
i. Increase
ii. Decrease
iii. Remain constant
iv. Impossible to tell
Since MR<MC (i.e., 18<27) and the marginal profit, being the difference between them, is negative. Thus the total profit will decrease if output increases slightly.

c. What happens to average total cost if ...

Solution Summary

The relationship between Average Total Cost, Average Variable Cost, Marginal Cost, Price, and Marginal Revenue as well as how these would be effected by small changes in output, is explained in detail.

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