3.2

Question 1

Fixed Costs (TFC)

Answer 1

• DO NOT change with output
• Rent, insurance, manager salaries
  AFC = FC/Qty

Question 2

Variable Costs (VC)

Answer 2

• DO change with output
• Raw materials, labor, electricity
  AVC = VC/Qty

Question 3

Total Costs (TC)

Answer 3

• Sum of TFC and TVC
• TC = TFC + TVC
  ATC = TC/Qty
  AVC+AFC = ATC

Question 4

Marginal Cost (MC)

Answer 4

Additional cost of one additional output
* Ex. If production of 2 or more units of output
increases total costs from $100 to $120, the MC is
$10
MC = Change in TC/Change in Qty
- MC curve cuts through AVC & ATC curves at
their minimum points.

Question 5

AFC

Answer 5

AFC, must decline as output increases
because the FC are being spread out over a larger quantity.

Question 6

AVC

Answer 6

The AVC curve is “U” shaped
* As added variable resources increase output, AVC
declines initially, reaches minimum, then goes back up.
* Diminishing returns require more and more variable
resources to produce each additional unit of output.

Question 7

Why does marginal cost always
go down then up? (MP)

Answer 7

As more workers are hired, their marginal product increases and
then eventually decreases because of the law of diminishing marginal returns.

Question 8

Why does marginal cost always
go down then up? (MC)

Answer 8

The additional costs (MC) of the units they produce fall when MP goes up, but eventually increase as additional workers produce less and less output.

Question 9

Why is the MC curve U-shaped?

Answer 9

The MC curve falls and then rises because of diminishing marginal returns.

Question 10

Shift of Cost Curves

Answer 10

A change in resource prices or technology will
cause the costs to change and the curves to
shift.
* If fixed costs increase, ATC will increase as well.
* This has no impact on MC or AVC
* If a variable resource changes, then MC, AVC
and ATC will shift.
* FC will not change.