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:
a. The movement of a company's administrative offices from New York City to New Jersey where rent costs are lower.
b. The use of two work shifts instead of three in a manufacturing plant.
c. An agreement reached with the labor union in which wage increases are tied to productivity increases of the workers.
d. The elimination of sugar quotas.
e. The imposition of strict environmental protection laws.
I am not sure, I need some help with these.
1) Rent is not part of variable cost and hence variable cost will remain same whereas average cost would come down with decrease in rent.
2) Reducing no of shift would decrease out put. Hence, both variable cost and average cost will increase and move up in the graph.
3) Variable cost would remain same if increase in productivity and wage increase proportionately. Also average cost would remain same.
4) Both variable cost and average cost would move up the graph.
5) Might cost increase in both variable and average cost in short term but can be beneficial in long term.
a. The movement of a company's administrative offices from New York City to New Jersey where rent costs are lower:
- Effect on AVC: The movement of administrative offices to a location with lower rent costs is likely to reduce the fixed costs, including administrative expenses. As a result, the average variable cost (AVC) per unit of production may decrease, assuming that variable costs such as labor and materials remain unchanged.
- Effect on ATC: Since the average total cost (ATC) is the sum of average variable cost (AVC) and average fixed cost (AFC), a decrease in fixed costs will lower the ATC curve. Therefore, the movement of administrative offices to a location with lower rent costs is expected to shift the ATC curve downward.
b. The use of two work shifts instead of three in a manufacturing plant:
- Effect on AVC: Reducing the number of work shifts may result in decreased variable costs, such as labor costs. The average variable cost (AVC) per unit of production may decrease due to the reduced labor expenses.
- Effect on ATC: Since the average total cost (ATC) is the sum of average variable cost (AVC) and average fixed cost (AFC), a decrease in variable costs will lower the ATC curve. Therefore, the use of two work shifts instead of three is expected to shift the ATC curve downward.
c. An agreement reached with the labor union in which wage increases are tied to productivity increases of the workers:
- Effect on AVC: Tying wage increases to productivity increases can incentivize workers to be more efficient, which may lead to lower variable costs. The average variable cost (AVC) per unit of production may decrease if productivity increases.
- Effect on ATC: Decreased variable costs resulting from increased productivity can lead to a lower average total cost (ATC). Therefore, the agreement with the labor union is expected to shift the ATC curve downward.
d. The elimination of sugar quotas:
- Effect on AVC: The elimination of sugar quotas can potentially lower the costs of sugar, which is an input in various industries. Lower input costs may result in a decrease in average variable cost (AVC) per unit of production.
- Effect on ATC: The decrease in variable costs due to the elimination of sugar quotas can result in a lower average total cost (ATC). Therefore, the elimination of sugar quotas is expected to shift the ATC curve downward.
e. The imposition of strict environmental protection laws:
- Effect on AVC: The imposition of strict environmental protection laws may require companies to invest in pollution control equipment, waste management systems, or other measures to comply with the regulations. These additional costs can increase variable costs and, as a result, average variable cost (AVC) per unit of production may increase.
- Effect on ATC: The increase in variable costs due to environmental compliance measures can lead to an increase in average total cost (ATC). Therefore, the imposition of strict environmental protection laws is expected to shift the ATC curve upward.
a. The movement of a company's administrative offices from New York City to New Jersey where rent costs are lower:
- Lower rent costs in New Jersey would reduce the company's fixed costs. Since average variable cost (AVC) is the variable cost per unit of output, it would not be directly affected by the move. However, average total cost (ATC), which is the total cost per unit of output, would be affected. The reduction in fixed costs would lead to a decrease in ATC.
b. The use of two work shifts instead of three in a manufacturing plant:
- Reducing the number of work shifts would lead to a decrease in labor costs. Labor costs are a significant component of variable costs, so the average variable cost (AVC) would decrease. The average total cost (ATC) would also decrease since the reduction in labor costs would lower the total cost per unit of output.
c. An agreement reached with the labor union in which wage increases are tied to productivity increases of the workers:
- Tying wage increases to productivity increases would incentivize workers to be more productive. As productivity increases, the company can produce more output with the same amount of resources, leading to a decrease in average variable cost (AVC). Consequently, average total cost (ATC) would also decrease as a result of the improved productivity.
d. The elimination of sugar quotas:
- The elimination of sugar quotas would allow the company to access sugar at a lower cost or from a greater variety of sources. This reduction in input costs would lead to a decrease in average variable cost (AVC). As a result, average total cost (ATC) would also decrease due to the lower cost of inputs.
e. The imposition of strict environmental protection laws:
- Strict environmental protection laws would require companies to invest in pollution control measures and comply with regulations, leading to an increase in production costs. The increased costs would raise the average variable cost (AVC) and, consequently, the average total cost (ATC) since the cost per unit of output would increase.