FACC 300 Lecture Notes - Lecture 4: Variable Cost, Fixed Cost
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Table 4.1 shows the weekly expenses of the Luna Farm. Suppose that wages are 5% higher, increasing the cost of labor by 5%.
By recalculating Tables 4.1 and 4.2, explain how the increase in wages will affect the (i) average variable cost and (ii) average cost.
Luna's management claims that it needs a 5% higher price to make up for the wage increase. Assess whether this claim is valid in the (i) short run and (ii) long run.
Table 4.1 short run weekely expenses
Table 4.2 Analysis of short-run costs
4.2 analysis of short run cost
Weekly production rate | fixed cost | variable cost | Total cost | Marginal cost | Average fixed cost | Average variable cost | Average cost |
0 | 22000 | 22000 | 22,000 | ||||
1000 | 22000 | 4290 | 26290 | 4.29 | 22 | 4.29 | 26.29 |
2000 | 22000 | 8360 | 30360 | 4.07 | 11 | 4.18 | 15.18 |
3000 | 22000 | 13160 | 35160 | 4.8 | 7.33 | 4.39 | 11.72 |
4000 | 22000 | 18970 | 40970 | 5.81 | 5.5 | 4.74 | 10.24 |
5000 | 22000 | 25930 | 47930 | 6.96 | 4.4 | 5.19 | 9.59 |
6000 | 22000 | 34150 | 56150 | 8.22 | 3.67 | 5.69 | 9.36 |
7000 | 22000 | 43700 | 65700 | 9.55 | 3.14 | 6.24 | 9.39 |
8000 | 22000 | 54620 | 76620 | 10.92 | 2.75 | 6.83 | 9.58 |
9000 | 22000 | 66960 | 88960 | 12.34 | 2.44 | 7.44 | 9.88 |