Multiple Choice
How do increases in gasoline prices typically affect the average variable cost (AVC) for firms in industries where gasoline is a key input?
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4. Elasticity
Price Elasticity of Supply
Multiple Choice
When gasoline prices increase, how are the average variable cost (AVC), marginal cost (MC), and average total cost (ATC) curves of most companies likely to be affected?
A
All three curves—AVC, MC, and ATC—shift downward.
B
Only the MC curve shifts upward, while AVC and ATC remain unchanged.
C
All three curves—AVC, MC, and ATC—shift upward.
D
Only the ATC curve shifts upward, while AVC and MC remain unchanged.
Verified step by step guidance1
Understand the definitions of the cost curves: Average Variable Cost (AVC) is the variable cost per unit of output, Marginal Cost (MC) is the additional cost of producing one more unit, and Average Total Cost (ATC) is the total cost (fixed plus variable) per unit of output.
Recognize that gasoline is a variable input cost for most companies, especially those involved in production or transportation. When gasoline prices increase, the variable costs increase because gasoline is part of the variable inputs.
Since AVC includes variable costs, an increase in gasoline prices will cause the AVC curve to shift upward, reflecting higher variable costs per unit of output.
Marginal Cost (MC) depends on the change in total cost from producing an additional unit, which includes variable costs. Therefore, an increase in gasoline prices will also shift the MC curve upward.
Average Total Cost (ATC) is the sum of average fixed cost and average variable cost. Since average fixed cost remains constant but average variable cost increases, the ATC curve will also shift upward.
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