Question

Table 1: Output and Costs of Bicycles
Output (units)
20
40
60
80
100
120
140
160
180
200
Marginal Cost ($)
110
95
85
80
85
110
155
230
280
340
Average Variable Cost ($)
190
165
145
130
115
110
115
125
140
160
A2-10. Table 1 shows output, marginal cost (MC), and average variable cost (AVC) for the production of bicycles.
Suppose the firm’s labour costs equal 80% of its total cost. How would an increase in the price of labour influence the firm’s total average cost in the short run? How would this change affect the firm’s total average cost in the long run?

Answer 1

Table 1: Output and Costs of Bicycles
Output (units)
20
40
60
80
100
120
140
160
180
200
Marginal Cost ($)
110
95
85
80
85
110
155
230
280
340
Average Variable Cost ($)
190
165
145
130
115
110
115
125
140
160
Labour costs equal 80% of its total cost.
As labour costs are the part of the total costs and average total costs are total costs per 1 unit of production, then an increase in the price of labour will increase the firm’s total average cost in the short run. This change will also increase the firm’s total average cost in the long run, so they will also increase, if the firm doesn't decrease other variable or fixed costs (cost of capital or some administrative costs).