Changes in the prices of key commodities can have a significant impact on a companys bottom line.
Question:
Changes in the prices of key commodities can have a significant impact on a company’s bottom line. But, changes in the price of energy produced from oil, gas, and electricity are not the only concern for companies.
According to an August 16, 2012, Bloomberg article,
“ethanol requirements are aggravating the rise in food costs and spreading it to the price of gasoline, which is up almost 40 cents a gallon since the start of July.” The U.S. government mandates that gasoline contain ethanol, which is derived from corn.
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.
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