Question

Workers at Sue's Surfboards negotiate a wage increase of \(\$ 100\) a week per worker. If other things remain the same, explain how Sue's Surfboards'short- run average cost curves and marginal cost curve change.

Short answer

The AVC, ATC, and MC curves will all shift upwards due to the wage increase.

Step-by-step solution

- Understand the Short-Run Cost Curves

In the short run, a firm's cost structure consists of both variable costs and fixed costs. The average cost curves, including average variable cost (AVC), average total cost (ATC), and marginal cost (MC), are affected by changes in these costs.

- Define the Impact of Wage Increase

The wage increase of \( \$100 \) per week is a rise in the variable cost because wages are typically considered a variable cost.

- Evaluate the Impact on Average Variable Cost (AVC)

Since AVC includes variable costs (such as wages), the increase in wages will raise the AVC curve upwards. This means that for each level of output, the AVC will be higher.

- Analyze the Effect on Average Total Cost (ATC)

The ATC is the sum of the AVC and average fixed cost (AFC). With higher AVC due to increased wages, the ATC will also rise. Thus, the ATC curve will shift upwards.

- Determine the Change in Marginal Cost (MC)

Marginal cost represents the additional cost of producing one more unit of output. The increase in wages will increase the marginal cost, shifting the MC curve upwards.

- Conclusion on the Curves

In summary, given the increase in wages, all short-run average cost curves (AVC and ATC) and the marginal cost curve will shift upwards.

Key concepts

average variable cost (AVC)

Average Variable Cost (AVC) is a key concept in understanding a firm's cost structure. AVC is calculated by dividing the total variable costs by the quantity of output produced. Variable costs include costs that vary with production levels, such as wages for workers. For example, if Sue's Surfboards pays higher wages, the total variable costs increase. Since AVC equals total variable costs divided by output, the increase in wages means AVC rises. This shift can be seen on a graph where the AVC curve moves upwards, indicating higher costs per unit of output due to increased wages.

average total cost (ATC)

Average Total Cost (ATC) represents the sum of average fixed costs (AFC) and average variable costs (AVC). ATC calculation is done by dividing the total cost (fixed + variable) by the quantity of output produced. With a wage increase, AVC goes up. Because ATC is the sum of AVC and AFC, an increase in AVC means that ATC also rises. Graphically, this is shown by an upward shift in the ATC curve, reflecting higher per-unit total costs. For instance, if Sue's Surfboards has higher wage expenses, it impacts ATC by increasing it across all levels of production.

marginal cost (MC)

Marginal Cost (MC) quantifies the additional cost required to produce one more unit. To calculate MC, you need the change in total cost divided by the change in output. With wage increments, the variable costs for producing each additional unit increase. Consequently, marginal cost rises. For Sue's Surfboards, each extra surfboard costs more to produce when wages are higher. This results in an upward shift in the MC curve, indicating that each new unit of output is now more expensive to create. An understanding of MC helps in decisions related to output level and pricing.

variable costs

Variable costs are those costs that change directly with the level of output. Common examples include labor wages, raw materials, and utilities. When Sue's Surfboards faces a wage increase, it directly impacts variable costs because paying workers falls under this category. The effect is an increase in total variable costs, leading to a higher AVC and ATC. Understanding variable costs is crucial because they fluctuate with production levels, making them a significant factor in short-run cost analysis. Firms need to manage these costs effectively to maintain profitability.

wage increase

Wage increases are significant because they directly influence a firm's variable costs. When workers at Sue's Surfboards negotiate a wage hike of $100 per week, it raises the firm's expenses for labor. This increase in labor costs leads to higher total variable costs, which raises AVC and ATC. Higher wages also cause the MC curve to shift upwards, indicating that the cost of producing additional units has risen. Businesses must consider these factors in their short-run cost analysis to make informed decisions on production and pricing strategies.