Assignment 2

ECO550, Fall Term 2010, Manassas Campus Homework #2: Cost Curves (20 points)

As with the previous homework assignment, please enter your answer below each question, such as under a. b. and c., etc. Also, please use a different font color than black.

1. Indicate the effect that each of the following conditions will have on a company’s average variable cost (AVC) and average total cost (ATC) curves: (12 points)

a. The movement of a company’s administrative offices from New York City to New Jersey where rent costs is lower.

There will be no effect on the AVC whereas the ATC will shift downwards reflecting the change in administrative costs. The AVC curve is not affected with the change in administrative cost as it only pertains to production and administrative cost is part of the fixed cost.

b. The use of two work shifts instead of three in a manufacturing plant.

The change in the work shifts will affect the AVC and shift downwards. ATC will in result shift downwards as it is combination of AFC and AVC.

c. An agreement reached with the labor union in which wage increases are tied to productivity increases of the workers.

AVC will shift upwards and ATC will shift downwards. This will be due to increase in productivity resulting in spreading the fixed cost over a larger number of units. The AVC will increase as the variable cost will go up with increased production.

d. The elimination of sugar quotas (as it pertains to those companies that use a lot of sugar such as bakeries and soft drink bottlers.)

Both AVC and ATC will go down due to elimination of sugar quotas. This will be due to increase in productivity resulting in spreading the fixed cost over a larger number of units. The AVC will decrease because the elimination of sugar quota will drive the price of sugar down with the increase competition in the market.

e. The imposition of strict environmental protection...