Indicate how each of the following would shift the (1) marginal-cost curve, (2) average-variable-cost curve, (3) average-fixed-cost curve, and (4) average-total-cost curve of a manufacturing firm. In each case specify the direction of the shift. a. A reduction in business property taxes.
MC AVC AFC ATC
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b. An increase in the nominal wages of production workers.
MC AVC AFC ATC
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c. A decrease in the price of electricity.
MC AVC AFC ATC
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d. An increase in insurance rates on plant and equipment.
MC AVC AFC ATC
(Click to select) Shift up Shift down No change (Click to select) Shift up Shift down No change (Click to select) Shift up Shift down No change (Click to select) Shift up Shift down No change
e. An increase in transportation costs.
MC AVC AFC ATC
(Click to select) Shift up Shift down No change (Click to select) Shift up Shift down No change (Click to select) Shift up Shift down No change (Click to select) Shift up Shift down No change

a. A reduction in business property taxes.

MC - No Change

AVC - No Change

AFC - Shift down

ATC - Shift down

Because business property taxes are a fixed cost, a reduction of this type would shift down bouth the AFC and ATC cost curves.

b. An increase in the nominal wages of production workers.

MC - Shift up

AVC - Shift up

AFC - No Change

ATC - Shift up

Production workers are direct labor, and as direct labor, their cost depends on the level of production. In other words, the wages of production workers are a variable cost, and an increase in their nominal wages would shift up the AVC, and the ATC.

The MC curve would shift up as well because now each additional unit of input (the production workers), becomes more expensive due to the wage increase.

c. A decrease in the price of electricity.

MC - Shift down

AVC - Shift down

AFC - Shift down

ATC - Shift down

Electricity can be both a fixed cost, and a variable cost. For example, the electricity used in the administrative offices is a fixed cost, while the electricity used to power machinery is a variable cost. As a result, a reduction in the price of it would shift down all the cost curves.

d. An increase in insurance rates on plant and equipment.

MC - No Change

AVC - No Change

AFC - Shift up

ATC - Shift up

Insurance rates on plant and equipment are a fixed cost, for this reason, an increase in the rates would shift up both the AFC and the ATC.

e. An increase in transportation costs.

MC - No Change

AVC - Shift up

AFC - No Change

ATC - Shift up

Transportation costs are mostly a variable cost: the more output, the more goods have to be delivered, the higher the transportation costs. An increase in these costs would shift up both the AVC and the ATC curves.

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answer; functional fixedness;