Question

Clerical workers form a union that successfully raises its members’ wages. What happens to the short-run average total cost curve and long-run average cost curve of a firm that hires clerical workers? What happens to thefirm’s marginal costs?

Answer 1

In the short-run, an escalation in the price level of a variable factor such as wage rate of clerical staff causes the AVC (average variable cost), AC (average cost) & MC to move up together. These curves maintain their shape & relative orientation.

MC intersects the new AC & AVC at their minimum points & the difference between AC & AVC is still Average Fixed Cost.

The primary distinction between long-term & short-term costs is that there aren’t any fixed factors in the long-term; there are both fixed factors & variable factors in the short-term. In the long-term the general level of prices, contractual wage rates, & expectations adjust completely to the economy’s state. In the short-term these variables don’t always adjust because of the compressed time period. To be successful a company must establish realistic long-term cost expectations. How the short-term costs are handled ascertains whether the company will fulfil its future production goals & financial goals.