Tuma Unlimited produces noodles in a perfectly competitive market. Its average total costs, marginal costs, and average variable costs have all decreased, but its average fixed costs haven't changed.

Which of the following would cause these changes?

Choose 1 answer:
(A) an improvement in productivity
(B) a tax on fixed costs
(C) an increase in fixed costs
(D) a tax on variable costs
(E) a subsidy on fixed costs

Question

Tuma Unlimited produces noodles in a perfectly competitive market. Its average total costs, marginal costs, and average variable costs have all decreased, but its average fixed costs haven't changed.

Which of the following would cause these changes?

Choose 1 answer:
(A) an improvement in productivity
(B) a tax on fixed costs
(C) an increase in fixed costs
(D) a tax on variable costs
(E) a subsidy on fixed costs

Accepted Answer

∻Solution∻ ‖ a ⋮ Average Total Cost (ATC) Formula: ATC is calculated as ATC = AFC + AVC, where AFC is average fixed cost and AVC is average variable cost. ‖ ‖ b ⋮ Impact of Productivity on Costs: An improvement in productivity typically leads to a decrease in variable costs because more output is produced with the same or less input, which lowers the AVC. If AVC decreases and AFC remains constant, ATC will also decrease. ‖ ‖ c ⋮ Analysis of Options: - (A) An improvement in productivity would decrease AVC and therefore ATC, without affecting AFC. - (B) A tax on fixed costs would increase AFC, which is not consistent with the scenario. - (C) An increase in fixed costs would also increase AFC, which is not consistent with the scenario. - (D) A tax on variable costs would increase AVC, which is not consistent with the scenario. - (E) A subsidy on fixed costs would decrease AFC, which is not consistent with the scenario as AFC hasn't changed. ‖ ∻Answer∻ ⚹ (A) an improvement in productivity ⚹ ∻Key Concept∻ ⚹ Productivity and Costs ⚹ ∻Explanation∻ ⚹ An improvement in productivity can lead to a decrease in average total costs, marginal costs, and average variable costs without affecting average fixed costs. ⚹◊How would a decrease in average total costs, marginal costs, and average variable costs, while keeping average fixed costs constant, impact the profit maximization decision for Tuma Unlimited as a perfectly competitive firm in the market?⍭ Generate me a similar question◊

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