Answer to Question #216385 in Microeconomics for Ida

Question

a)    Despite being a small local sundry shop, I can always beat the price that Tesco charges for the same product. Tesco must pay rent on its store while I own my own shop and have no rent to pay. Discuss.

(10 marks)

 

b)    Evaluate and explain these two statements.

1.    An increase in fixed cost increases the minimum-cost output.

2.    An increase in fixed cost increases marginal cost.

(10 marks)

Answer 1

Tesco, in my opinion, is a large store with a high fixed cost, as opposed to a tiny local miscellaneous shop, which has a fixed cost that is almost certainly lower than Tesco's. This is why a small neighbourhood sundry business may undercut Tesco's price. The profit margin will be narrower when the fixed cost is larger. In this case, Tesco must devise a strategy for boosting revenues to offset the fixed costs. On the other hand, small local miscellaneous shops enjoy a high profit margin since their fixed costs are lower. They may run the shop at a lower cost area and smaller than Tesco, which is why they have a low fixed cost. This is why a small neighbourhood sundry shop may undercut Tesco's price for the identical item. This is why people prefer to shop in small shops since they are more convenient, have lower prices, and have a wider selection of things to choose from.

1. An increase in fixed cost increases the minimum-cost output.

The additional cost of creating an additional unit of output is independent of the fixed cost since fixed costs do not change when output increases.

 2. An increase in fixed cost increases marginal cost.

Although the marginal cost reflects the change in total cost as a function of a change in manufacturing output level, it is unaffected by changes in fixed expenses. The marginal cost of production, for example, is 0 if there are solely fixed costs connected with manufacturing items.