4. Engineers for the Off Road Skateboard Company have determined that a 10% increase in all inputs will cause output to increase by 5%. Assuming that input prices remain constant, you correctly deduce that such a change will cause ________ as output increases.
A) total cost to decrease
B) average costs to increase
C) average costs to decrease
D) average fixed costs to increase
total cost to decease
Based on the given information, we can deduce that the 10% increase in all inputs will cause output to increase by 5%. In this scenario, we can determine the effect on average costs.
To calculate average costs, we divide the total cost by the quantity of output. Since input prices remain constant, the total cost of production will increase by 10% due to the increase in inputs. However, the increase in output is only 5%.
Therefore, the average costs will increase as the total cost increases at a higher rate than the output.
Therefore, the correct answer is:
B) average costs to increase.
To determine the effect on costs as output increases, we need to consider the relationship between input prices and output.
Given that a 10% increase in all inputs causes output to increase by 5%, we can infer that the company is experiencing decreasing returns to scale. This means that the rate of increase in output is less than the rate of increase in inputs.
In this scenario, the costs are likely to increase. This can be explained as follows:
1. Total cost: Since output is increasing, the total cost is expected to increase as well. Therefore, option A) "total cost to decrease" is incorrect.
2. Average costs: To calculate average costs, we divide the total cost by the output. Since the total cost is increasing and the output is increasing at a slower rate, the average costs will increase. Therefore, option B) "average costs to increase" is correct.
3. Average fixed costs: These costs do not change with changes in output, so they will remain constant regardless of the increase in output. Therefore, option D) "average fixed costs to increase" is incorrect.
4. Average variable costs: Since the average costs are increasing, this implies that the average variable costs (which make up the difference between total costs and fixed costs) are also increasing. Therefore, option C) "average costs to decrease" is incorrect.
In conclusion, the correct answer is B) average costs to increase.