S. Klepper, Economics 73-100, Fall 2011

Solution to Quiz 4

The increase in total variable cost of 10% at every level of output increases marginal and average variable cost by 10% at every level of output. With average variable cost rising by 10% at every level of output, the minimum of the average variable cost across all output levels increases by 10%. The increase in fixed costs of 10% has no effect on marginal or average variable costs, but it increases average fixed cost by 10% at every level of output. Since average total cost equals average fixed cost plus average variable cost, average total cost must rise by 10% at every level of output. Firms supply the level of output such that the marginal cost of the marginal unit of output equals price. Although price does not change, marginal cost increases at every level of output. Therefore, at the output supplied prior to the cost increases, marginal cost would exceed price after the cost increases. Consequently, all electricity producers would supply less output after the cost increases. Finally, the increase in costs has no effect on the quantity demanded at each price. Consequently, the market demand curve is unaffected by the cost changes.

Based on this description, the answers to the individual questions are:

_____1. False

_____2. True

_____3. True

_____4. False

_____5. False