|Question||Changes in the prices of key commodities can have a significant impact on a company’s bottom line. According to a September 27, 2007, article in the Wall Street Journal, “Now, with oil, gas and electricity prices soaring, companies are beginning to realize that saving energy can translate into dramatically lower costs.” Another Wall Street Journal article, dated September 9, 2007, states, “Higher grain prices are taking an increasing financial toll.” Energy is an input into virtually all types of production; corn is an input into the production of beef, chicken, high-fructose corn syrup, and ethanol (the gasoline substitute fuel).
a. Explain how the cost of energy can be both a fixed cost and a variable cost for a company.
b. Suppose energy is a fixed cost and energy prices rise. What happens to the company’s average total cost curve? What happens to its marginal cost curve? Illustrate your answer with a diagram.
c. Explain why the cost of corn is a variable cost but not a fixed cost for an ethanol producer.
d. When the cost of corn goes up, what happens to the average total cost curve of an ethanol producer? What happens to its marginal cost curve? Illustrate your answer with a diagram.