Ans 1

Quantity Total Total Total Average Average Average Marginal

Cost Fixed Variable Cost Fixed Variable Cost
(TC) Cost Cost (AC) Cost Cost (MC)
(TFC) (TVC) (AFC) (AVC)
0 ⁣⁣``---
120⁣ 120⁣ 0⁣⁣ ⁣---⁣ ---⁣⁣ ---⁣⁣
``-
1 265⁣ 120 145⁣⁣ 265D 120 145 145⁣⁣
2 384⁣ 120 264 192I 60 132⁣⁣ 119⁣⁣
3 483 120 363 161C 40 121⁣⁣ 99
4 568 120 448 142T 30 112 85
5 645⁣⁣ 120 525⁣⁣ 129 24 105 77
6 720⁣⁣ 120 525⁣⁣ 120 20 88 75
7 799⁣⁣ 120 679⁣⁣ 114 17 97 79⁣⁣
8 888⁣⁣ 120 768⁣⁣ 111 15 96 89⁣⁣
9 993⁣⁣ 120 873⁣⁣ 110⁣ 13⁣⁣ 97 105⁣⁣
10 1120 120 1000⁣⁣ 112 12 100 127⁣⁣

Ans 5

a. False. In most economic decisions only those costs and revenues which are affected or
report a change need to be analyzed. Raw material costs may or may not be a part of the
change. If they are then the change needs to be estimated, and revalued at beliefs of future
price, to arrive at net benefit of the business decision. If they are not, ie Raw Material Costs
are not affected by the plan, then the business maker need not.

b. True. This is also known as Second order Condition for profit maximization. Marginal cost
below the the average variable costs, (then the Average Variable Cost would be greater than
MC for last unit and equal to MC for this unit), ‘pulls’ AC and AVC downwards. Conversely,
marginal cost above the average cost then the average cost pulls the AVC upwards.

Minimum Q*
c. True. The firm is experiencing constant returns to scale.

d. True. To stay put in long run, the firm would look at LRAC and where it stands with respect
to Price. Whereas a firm in the short run can stay running at MC = P at or above minimum of
AVC (the point where the two curves intersect). This could mean however, that firms would
be operating below AC, and foregoing Fixed or Depreciation costs. Which makes short run
supply curve the MC curve above AVC.
There is an opportunity cost of staying in Business. No firm would be foregoing Fixed costs in
Long term supply curve. Long Term Supply curve would thus be the curve of LRMC above
LRAC.
 e. False. Only in Long Run and Pure Competition where there are entrants who are perfectly
efficient, zero frictional costs of transaction or search etc., firms experience a Demand like a
horizontal price bar. When that happens, in the long run the equilibrium price will intersect
LRAC and LRMC at minimum LRAC. Obviously to stay in business, the firm has to
continuously try to cut wastage including over production to stay at minimum LRAC. Else a
firm could incur economic profits at a price of intersection above intersection of LRMC and
LRAC.

6.

a. Rental Costs are Fixed costs: They do not vary with quantity produced. AVC curve remains same.
AC costs is lowered, shifts right.

b. Effect on AVC: Same. With change in quantity, AFC curve remains same, AC remains same.
 AVC & AC remain same. Quanity truncated.
340

290
ഥ
𝑷
240
Quantity

190

140

90
25 35 45 55 new
Q** 65
Q* old qty. 75
Price

c. Both AVC and AC shift left (increase in average costs w.r.t same Quantity).

AVC & AC both shift left.

320

270

220
Quantity

AVC1
AVC2
170
AC2
AC1
120

70
25 35 45 55 65 75
Price

d. The AVC and AC will not shift, just extend upwards from the point of quota truncation.
 ഥ
𝐏

Q* with Quota Q** quota removed

e. Imposition of stricter laws may be in form of a per unit Tax / (Or, Variable Filtration costs)
such as carbon Tax. The AVC and AC might shift left (Over relevant increasing portions), or
alternatively continue unaltered till a certain quantity and then turn left. If no Tax/ Costs are
imposed, no change is observed.

AVC & AC shift left in imposition of Quantity linked

Taxes.
.
340

290
Quantity

240 AC1
AVC2
190
AC2
140 AVC1

90
25 35 45 55 65 75
Price