Answer to Question #82728 in Microeconomics for kawthar

Question

Do you think that a reduction in the firm’s variable cost would be beneficial for the company in the short run? If yes, why, If no, why not?
What is the relation between the firm’s output and its marginal cost?
Suggest how the firm can reduce the total cost of production
What is your explanation on prevailing cost conditions of the chosen firm?

Answer 1

Yes, reduction in firms variables cost would be beneficial for the company in the short run because there are only two ways to maximize a firm profit. One is increase in revenue and other one is cost minimization. In cost minimization option, a firm can only maximize its profit in short run by reducing its variable cost because fixed cost can never be reduced in the short run. Therefore, reduction in variable cost would be beneficial for a company in the short run because it reduced total cost and make company competitive in the market.

Marginal cost means additional cost which a firm paid for production of each additional unit of output. For example, if Samsung paid $80 dollars to produce first cell phone and $85 to produce another cell phone then additional $5 would be the marginal cost of Samsung to produce additional unit of cell phone. Therefore, there is a direct relationship between firms marginal cost and output. As the firm increases its production, it may achieve economies of scale and its marginal cost will reduced to produce each additional unit of output. However, when marginal revenue of a firm is equal to marginal cost then that will be the profit maximizing output of any company.

Total cost of a firm consists of variable cost and fixed cost. In short run, a firm cannot reduced its fixed cost like plant, machinery etc. and only can change variable cost like daily payment to worker, rent etc. In short run a firm can only reduce its total cost by reducing variable cost through efficient allocation of resources and in the long run, total cost might be reduced through reduction in both variable cost and fixed cost. For example, if a company have extra building and paying rent of that building each month which increasing variable cost, then giving away of that building will reduce the variable cost and firms total cost in the short run will automatically reduce. On the other hand, in the long run a firm can reduce its total cost by switching to an efficient production plant or by installing new machinery which for the tine being would increase its total cost but in the long run it will definitely reduce total cost as marginal product of the firm will increase.

It is very difficult to get inside of cost structure of any company because that may reduce their competitive edge in the market. Therefore, I have just forecast the costing structure of the chosen firm which is Samsung in this case. Samsung showing tremendous increase in profit in recent years that means their cost of production in much lower than the selling price.