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?
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4. Elasticity
Price Elasticity of Supply
Multiple Choice
If costs of production rise, the producer has an incentive to produce _____ output.
A
unlimited
B
constant
C
more
D
less
Verified step by step guidance1
Understand the relationship between production costs and output: When the costs of production increase, it becomes more expensive for the producer to make each unit of output.
Recall the law of supply: Generally, if production costs rise and prices remain constant, producers will supply less output because producing the same quantity is less profitable.
Consider the producer's profit maximization goal: Producers aim to maximize profit, which is total revenue minus total cost. Higher costs reduce profit margins for each unit produced.
Analyze the incentive effect: Since producing more output now costs more, the producer is incentivized to reduce output to avoid losses or lower profits.
Conclude that with rising production costs, the producer will produce less output, all else equal.
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