7. Sometimes we use math to determine precise cost curves.

Other times, we must rely on our

economic intuition to determine how various situations will impact our firm’s cost curves. For
each of the four scenarios below, determine how each event would affect our firm’s marginal,
average, and average variable cost curves. Consider each situation independently.  

a. An increase in employee wages

That’s the price of labor. This increases the variable cost. Results in increases in the marginal
cost, average variable cost and average cost.

b. A decrease in material costs

Material entails variable input. A decrease in the cost of the material results in a decrease in the
price of a variable input. Thus, there is a decrease in AVC, MC and AC

c. The government imposes a fixed amount of tax (i.e. it is not a percentage tax but a fixed dollar
amount)

A fixed tax entails fixed cost. Thus, the fixed cost increase. This leads to an increase in average
cost. Marginal cost and AVC remain unchanged.

d. The rent that the firm pays on their building lease decreases. 

Rent is part of fixed cost. Thus, AC decreases, while MC and AVC remain the same.