2) Suppose that before Microsoft decreases production of Windows and eliminates jobs, it is producing at minimum ATC. What is the initial effect on AVC, AFC, and MC of a decrease in production?
AVC ____________, AFC ____________, and MC ____________.
Wrong! - With the decrease in production, total fixed cost is spread over a smaller output. Does AFC decrease or increase? As Microsoft decreases production of Windows, MC is less than ATC and greater than AVC. With MC greater than AVC, does AVC increase or decrease as production decreases? How does MC change?
Well Done! - As Microsoft decreases production of Windows, MC is less than ATC and greater than With MC greater than AVC, AVC and MC decrease as production decreases. And with the decrease in production, total fixed cost is spread over a smaller output, so AFC increases.
