a) Draw a graph that illustrates the average total cost, average variable cost, average fixed cost and marginal cost curves for a firm. List any assumptions you have made in constructing this graph.

b) Assume that your answers to part a) represent the cost curves for a wine making firm. Illustrate and explain how each of the following affects the firm’s average total cost, average variable cost, average fixed cost and marginal cost. (i) An increase in the price of labour. (ii) A reduction in the annual rent the company pays on its warehouse.

c) With the aid of relevant diagrams, illustrate and explain the shapes of short-run and long run average total cost curves, and the logic behind the points at which these curves meet.