Answer:
a. Explain how the cost of energy can be both a fixed cost and a variable cost for a company.
Energy is a fixed cost when it affects divisions of the company that are not directly related with the production process, for example, the energy used to power the administrative office.
Energy becomes a variable cost when it powers things such as machinery or equipment, that are directly related with the production process of a good.
b. Suppose energy is a fixed cost and energy prices rise. What happens to the company’s average total cost curve? What happens to its marginal cost curve? Illustrate your answer with a diagram.
The average total cost curve goes up, because the fixed cost curve is a part of the average total cost curve, and energy, as a fixed cost going up, rises the fixed cost curve as well.
The marignal cost curve does not change, because it is not affected by the rise of the cost of energy when it is a fixed cost.
c. Explain why the cost of corn is a variable cost but not a fixed cost for an ethanol producer.
Because corn is the raw material used to make ethanol. For an ethanol producer, the cost of producing ethanol changes depending on the amount of corn used.
d. When the cost of corn goes up, what happens to the average total cost curve of an ethanol producer? What happens to its marginal cost curve?
Both curves go up, because both curves are affected by an increase in the price of corn when corn is a variable cost.
