6. Indicate the effect that each of the following conditions will have on a firm
ID: 1109283 • Letter: 6
Question
6. Indicate the effect that each of the following conditions will have on a firm's average vari- able cost curve and its average cost curve a. The movement of a brokerage firm's administrative offices from New York City to New Jersey, where the average rental cost is lower b. The use of two shifts instead of three shifts in a manufacturing facility c. An agreement reached with the labor union in which wage increases are tied to productivity increases d. The elimination of sugar quotas (as it pertains to those firms that use a lot of sugar, such as bakeries and soft drink bottlers) e. Imposition of stricter environmental protection lawsExplanation / Answer
Average total cost will change if there is a change in the fixed cost as well as a variable cost. This implies average total cost will change when there is a change related to production process or whether there is a change in fixed factors such as rental cost electricity charges telephone bills lease.
In the first case only average total cost is decreased because rental cost does not depend upon whether production is carried out or not.
When there are three shifts in a manufacturing facilities the average variable cost will increase and hence average total cost will also increase.
III case again has an increase in both the average variable cost and average total cost because production and wage rate are associated with level of economic activity done in the firm
When there is in elimination of quota then production can be increased and it will increase the average total cost as well as average variable cost
Stricter environmental protection laws will increase both average variable cost and average total cost because it will affect the production level.
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