Question

Changes in the prices of key commodities have a significant impact on a company's bottom line. For virtually all companies, the price of energy is a substantial portion of their costs. In addition, many industriesâsuch as those that produce beef, chicken, high-fructose corn syrup, and ethanolâare highly dependent on the price of corn. In particular, corn has seen a significant increase in price. (a) Explain how the cost of energy can be both a fixed cost and a variable cost for a company. (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. (c) Explain why the cost of corn is a variable cost but not a fixed cost for an ethanol producer. (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? Illustrate your answer with a diagram.

Answer 1

Answer:

Explanation:

A) Energy can be both a fixed cost and a variable cost for a company. This is due to the sense that energy in the form of fixed electricity bill even when no production takes place (telephone bill), a fixed cost and electricity bill when production takes place would be a variable cost

B) An increment in fixed cost will shift the ATC curve to the right while the MC curve would remain the same because MC is the change in variable cost as output increases and is not related to fixed cost.

C) Corn cost is a variable cost for ethanol producer as each unit of corn is used to produce ethanol and thus use of corn is reliant upon how much ethanol is produced. This makes corn a variable input dependent on the production of output, therefore, the cost of corn is variable.

D) An increment in the variable cost will shift the ATC curve to the right and individual MC curve to the right.