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You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $500,000 per month, and you have contractual labor obligations of $1 million per month that you can’t get out of. You also have a marginal printing cost of $0.25 per paper as well as a marginal delivery cost of $0.10 per paper.

If sales fall by 20 percent from 1 million papers per month to 800,000 papers per month, what happens to the AFC per paper?

b. What happens to the MC per paper?

Solution

a) AFC = TFC/Q

Thus, as Q falls, the AFC is expected to rise.

Here, TFC = 500,000 + 1,000,000 = 1,500,000

Initial AFC = 1,500,000/1,000,000 = 1.5

New, TFC = 1,500,000/800,000 = 1.875

Hence, the AFC increases from 1.5 per paper to 1.875 per paper.

b) MC per paper will remain the same due to a change in total output. It is actually the per unit change in TC cost when output changes by 1 unit.

So, MC remains constant at 0.25 + 0.10 = 0.35 per paper.

Thanks!