Answer to Question #156616 in Accounting for Anaya Sheikh

Question

A firm uses two inputs in production: capital and labor. In the short run, the firm cannot adjust the amount of capital it is using, but it can adjust the size of its workforce. What happens to the firm’s average total cost curve, the average variable cost curve, and marginal cost curve when

a. the cost of renting capital increases?

b. the cost of hiring labor increases?

Answer 1

according to the formulas:

ATC = TC / Q

AVC = TVC / Q

MC = Δ TC / Δ Q.

the cost of renting capital increases - FC

the cost of hiring labor increases - VC

a. ATC - growing

AVC - doesn't change

MC - growing

b. ATC - growing

AVC - growing

MC - growing

At constant production volumes