Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 7: Problem 5

In a recent year, a long, hard winter gave rise to stronger-than-normal demand for heating oil. The following summer was characterized by strong demand for gasoline by vacationers. Show what these two events might have done to the short-run \(M C, A V C\) and \(A T C\) curves of Continental Airlines. (Hint: How would these events affect the price of oil?)

Short Answer

Expert verified
The increased demand for heating oil and gasoline, leading to raised oil prices, will cause the MC, AVC, and ATC curves of Continental Airlines to shift upward in the short-run due to increased costs for jet fuel.

Step by step solution

01

Impact on Oil Prices

First, consider the effects of the hard winter and strong summer demand for gasoline on the oil market. Both heating oil and gasoline are derivatives of crude oil. An increase in demand for both will likely cause the price of crude oil to spike upward due to the inelastic short-term supply of oil.
02

Impact on Airline Costs

Next, consider the impact of higher oil prices on Continental Airlines. Jet fuel, a significant variable cost for airlines, is also derived from crude oil. As the price of oil rises, the cost of jet fuel will also rise. This will increase both the variable and total costs for the airline.
03

Shifts in Cost Curves

Finally, consider how these cost increases translate into shifts in the cost curves. A rise in variable cost due to more expensive fuel will cause the AVC and MC curves to shift upward. Since ATC is also affected by changes in variable costs, the ATC curve will also shift upward.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The following table gives the short-run and long-run total costs for various levels of output of Consolidated National Acme, Inc.: $$\begin{array}{ccc}Q & T C_{1} & T C_{2} \\\\\hline 0 & 0 & 350 \\\1 & 300 & 400 \\\2 & 400 & 435 \\\3 & 465 & 465 \\\4 & 495 & 505 \\\5 & 540 & 560 \\\6 & 600 & 635 \\\7 & 700 & 735\end{array}$$ a. Which column, \(T C_{1}\) or \(T C_{2},\) gives long-run total cost, and which gives short-run total cost? How do you know? b. For each level of output, find short-run \(T F C\) \(T V C, A F C, A V C,\) and \(M C\) c. At what output level would the firm's short-run and long-run input mixes be the same? d. Starting from producing two units, Consolidated's managers decide to double production to four units. So they simply double all of their inputs in the long run. Comment on their managerial skills. e. Over what range of output do you see economies of scale? Diseconomies of scale? Constant returns to scale?

Down On Our Luck Studios has spent \(\$ 100\) million producing an awful film, \(A\) Depressing Story About \(a\) Miserable Person. If the studio releases the film, the most cost-effective marketing plan would cost an additional \(\$ 5\) million, bringing the total amount spent to \(\$ 105\) million. Box office sales under this plan are predicted to be \(\$ 12\) million, which would be split evenly between the theaters and the studio. Additional studio revenue from video and DVD sales would be about \(\$ 2\) million. Should the studio release the film? If no, briefly explain why not. If yes, explain how it could make sense to release a film that cost \(\$ 105\) million but earns only \(\$ 12\) million.

"If a firm has diminishing returns to labor over some range of output, it cannot have economies of scale over that range." True or false? Explain briefly.

The following table shows total output (in tax returns completed per day) of the accounting firm of Hoodwink and Finagle: $$\begin{array}{cc}\text { Number of } & \text { Number of Returns } \\\\\text { Accountants } & \text { per Day } \\\\\hline 0 & 0 \\\1 & 5 \\\2 & 12 \\\3 & 17 \\\4 & 20 \\\5 & 22\end{array}$$ Assuming the quantity of capital (computers, adding machines, desks, etc.) remains constant at all output levels: a. Calculate the marginal product of each accountant. b. Over what range of employment do you see increasing returns to labor? Diminishing returns? c. Explain why \(M P L\) might behave this way in the context of an accounting firm.

Draw the long-run total cost and long-run average cost curves for a firm that experiences: a. Constant returns to scale over all output levels. b. Diseconomies of scale over low levels of output, constant returns to scale over intermediate levels of output, and economies of scale over high output levels. Does this pattern of costs make sense? Why or why not?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free