Understanding Cost Structures, Market Dynamics, And The Impact Of Price Changes

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Understanding Cost Structures, Market Dynamics, and the Impact of PriceChanges1)What is the difference between average cost and marginal cost, and how do they relate to eachother in terms of output production?Average cost is the total costdivided by the output. This assigns the same cost to eachunit produced. Marginal cost is the cost of the last unit produced.Average cost takes on a U shape. Initially, it is more cost effective to produce multipleunits than a single unit. However, as output continues to increase, eventually theaverage cost will begin to rise.The marginal cost is factored into the average total cost at every unit. As long as someof the costs are fixed, marginal cost will begin below average total cost. Asoutputincreases,the marginal cost will rise but the average cost will drop. Eventually theyintersect,and thenthe marginal costcontinues to increase and pullsthe average cost upwith it but at a slower rate.2)a) Can a farmer increase total revenue by raising the price of wheat when there are manycompetitors in the market? b) Can a farmer increase total revenue by raising the price of wheatif there is only one source of supply in the market?For parta, the farmer will not be able to increase his total revenue by simply raising hisprice. This is a result of supply and demand. If there are a large number of farmersselling wheat, then the discerning shopper will purchase from someone selling at $10per bushel rather than a higher price.For part b, the farmer would probably be able to increase his revenue with a change inprice, provided that the price change was deemed reasonable by the community. This isalso supply and demand, but coming from the other side. When demand is high andthere is only one source for supply, then it becomes easier to increase revenue simplyby charging a larger amount.3)a) How does an increase in consumer income taxes affect the demand and supply in themarket for a good? b) How does a decrease in demand (due to an increase in consumerincome tax) impact the price, output, and profits in the industry?

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