- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 3. Marginal Revenue, Marginal Cost and Profit Maximization
CFA Practice Question
If a technological advance brings more capital and less labor into use, fixed costs ______ (increase/decrease) and variable costs ______ (increase/decrease). Average total cost ______ (increases/decreases) at low output levels and ______ (increases/decreases) at high output levels.
Correct Answer: increase; decrease; increases; decreases
User Contributed Comments 7
| User | Comment |
|---|---|
| indrasenareddy | average o/p = will it not decrease at LOW o/p level and increase at high O/p level. Can some one please confirm |
| 2014 | When production increases fixed cost decline. So at low out we have high average fixed cost and as output increases we have we have low average fixed cost. Hence, total cost is higher initially and reduces as production rises |
| gill15 | No idea what's going on here. Im trying to relate this to the CFA books(2012)... I understand FC increasing along the Longrun average total cost curve(LTARC)...not sure why variable costs decrease along it.....dont understand whats going on the average total cost...are they talking about short run average total cost or long run average total cost.....confused all around. |
| gill15 | Never mind...got it...good question.. |
| J0rdanl | Why does FC increase to begin with? (First blank). This must be an internal technology advancement then so it is considered a fixed cost? (R&D?) |
| ascruggs92 | They have to buy the new technology and install it, at which point it becomes a sunk cost (would cost money to uninstall). Because ATC is total cost divided by total output, any time fixed costs go up, so will ATC. ATC decreases at high output levels (relative to before the technology) because VC are lower, and AFC decreases as output inc. |
| choas69 | @Jordan: 1- you have to maintain those equipment and other overhead costs so fixed costs increase and less wages (variable) decreases; 2- now since you have more average fixed cost in total average cost than average variable cost at low level out put you have more average total cost compared to the normal situation, then at high level out put it will decreases. |