1a) (8 points) An increase in the price of a product (P), along with an increase in the price of an input factor (P I ), is certain to lead to an increase in quantity supplied (Q S ). Indicate whether you believe the statement is True or False , and then briefly explain your answer. 1b) (8 points) An increase in the dollar amount of fixed costs increases marginal cost. Indicate whether you believe the statement is True or False , and then briefly explain your    answer. Solution (a) The statement is false. (b) The statement is again false. Fixed cost is not at all related to marginal cost. Fixed cost is in fact related to average cost. Marginal cost depends on variable cost. For example, a company pays only rent as it total cost. Here monthly rent is fixed. It does not matter whether firm produces 1 output or 100 output. The marginal cost will remain zero. The additional cost of producing extra output is nil in this case. Hence fixed cost has no connection with margianl cost. .

1. 1a) (8 points) An increase in the price of a product (P), along with an increase in the price of an
input factor (P I
), is certain to lead to an increase in quantity supplied (Q S
). Indicate whether
you believe the statement is True or False , and then briefly explain your answer.
1b) (8 points) An increase in the dollar amount of fixed costs increases marginal cost. Indicate
whether you believe the statement is True or False , and then briefly explain your   answer.
Solution
(a) The statement is false.
(b) The statement is again false.
Fixed cost is not at all related to marginal cost. Fixed cost is in fact related to average cost.
Marginal cost depends on variable cost.
For example, a company pays only rent as it total cost. Here monthly rent is fixed. It does not
matter whether firm produces 1 output or 100 output. The marginal cost will remain zero. The
additional cost of producing extra output is nil in this case.
Hence fixed cost has no connection with margianl cost.