Set8Answers - Practice Questions and Answers from Lesson...

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Practice Questions and Answers from Lesson III-1: Inputs and Costs Practice Questions and Answers from Lesson III-1: Inputs and Costs The following questions practice these skills: Identify total cost, variable cost, fixed cost, marginal cost, and average total cost. Graph marginal cost and average total cost and average variable cost. Identify fixed inputs and variable inputs. Compute the marginal product of labor. Compute marginal cost, variable cost, average fixed cost, average variable cost, and average total cost. Identify the implications of the principle of diminishing returns. Distinguish between the short run and the long run by identifying whether some inputs are fixed. Identify increasing returns to scale, and decreasing returns to scale Question: Changes in the prices of key commodities can have a significant impact on a company’s bottom line. According to a September 27, 2007, article in the Wall Street Journal, “Now, with oil, gas and electricity prices soaring, companies are beginning to realize that saving energy can translate into dramatically lower cogs.” Another Wall Street Journal article, dated September 9, 2007, states, Higher grain prices are taking an increasing financial toll.” Energy Is an input into virtually all types of production; corn is an input into the production of beef, chicken, high-fructose corn syrup, and ethanol (the gasoline substitute fuel). a. Explain how the cost of energy can be both a fixed cost and a variable cost for a company. b. Suppose energy is a fixed cost and energy prices rise. What happens to the company’s average total cost curve? What happens to its marginal cost curve? Illustrate your answer with a diagram. c. Explain why the cost of corn is a variable cost but not a fixed cost for an ethanol producer. d. When the cost of corn goes up, what happens to the average total cost curve of an ethanol producer? What happens to its marginal cost curve? Illustrate your answer with a diagram. Answer to Question: a. Energy required to keep a company operating regardless of how much output is produced represents a fixed cost, such as the energy costs of operating office buildings, factories, and stores that must be maintained Independent of the amount of output produced. In addition, energy is a variable cost because produci ng more output almost always requires using more energy. b. When fixed costs increase, so will average total costs The average total cost curve will shift upward. In panel (a) of the accompanying diagram, this is illustrated by the movement of the average total cost curve from its initial position, ATC1, to its new position, ATC. The marginal cost curve is not affected if the variable costs do not change. So the marginal cost curve remains at its initial position, MC. c.
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This note was uploaded on 09/25/2011 for the course BSAD 314 taught by Professor Staff during the Spring '10 term at SUNY Canton.

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Set8Answers - Practice Questions and Answers from Lesson...

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