71.. Because of higher gasoline prices, firms using gasoline intensively in the production or distribution of their goods have experienced

A. an upward shift in their MC, AVC, and ATC curves.
B. an upward shift in their AFC, AVC, and ATC curves.
C. a downward shift in their MC, AFC, and AVC curves.
D. greater economies of scale.

a competitive industry will produce

that level of output where average total cost is at a minimum.

Question

71.. Because of higher gasoline prices, firms using gasoline intensively in the production or distribution of their goods have experienced

A. an upward shift in their MC, AVC, and ATC curves.
B. an upward shift in their AFC, AVC, and ATC curves.
C. a downward shift in their MC, AFC, and AVC curves.
D. greater economies of scale.

a competitive industry will produce

that level of output where average total cost is at a minimum.

BlackTom AI · Accepted Answer

An increase in the price of a variable input (gasoline) raises the firm’s variable costs, so marginal cost (MC), average variable cost (AVC), and average total cost (ATC) curves shift upward.

1) Relevant concepts:
- Fixed vs. variable costs: fixed costs (and average fixed cost, AFC) do not change with input price changes in the short run; variable costs do.
- Marginal cost (MC) depends on the change in total variable cost from producing one more unit; thus MC rises when variable input prices rise.
- Average variable cost (AVC) is total variable cost divided by output; it rises when variable input prices rise.
- Average total cost (ATC) = AFC + AVC, so any change in AVC changes ATC.
- In long-run competitive equilibrium, firms produce where price = minimum ATC (zero economic profit).

2) Step-by-step reasoning:
- Gasoline is used in production/distribution and its price increases → the cost per unit of variable input rises.
- Total variable cost (TVC) increases for every level of output. Since MC = ΔTVC/ΔQ, MC increases at each output level.
- AVC = TVC/Q increases because TVC is higher for each Q.
- AFC = TFC/Q remains unchanged because total fixed cost (TFC) is unaffected by gasoline price.
- ATC = AFC + AVC therefore increases by the same vertical amount as AVC at each Q (plus the unchanged AFC), so ATC shifts upward.

3) Intermediate logical steps:
- Higher gasoline price → higher TVC at Q and Q+1 → ΔTVC larger → MC curve shifts up.
- Higher TVC/Q → AVC curve shifts up → ATC = AFC + AVC shifts up.
- AFC curve does not move since TFC unchanged.

4) Why A is correct:
Option A states an upward shift in MC, AVC, and ATC — exactly the curves affected when a variable input price increases.

5) Why other options are incorrect:
- B: claims AFC shifts up; AFC depends on fixed costs, so it does not change when gasoline price changes.
- C: claims downward shifts in MC, AFC, and AVC, which is the opposite of the effect and wrong for AFC as well.
- D: claims greater economies of scale; an input price increase does not improve technology or scale efficiencies and does not create greater economies of scale.

6) Conclusion:
Therefore the correct choice is A, which matches the provided answer.

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