**2012 Multiple Choice (Output & Costs)**

**Answer - (B) rise initially, but eventually fall**

**Answer - (D) Average fixed costs**

Understand that AFC = FC/Q

Example - FC = $100 and we produce 10 units then AFC = $100/10 = $10 meaning that each unit we produce covers $10 of the fixed costs.

If....

FC = $100 and we produce 1000 units then AFC = $100/1000 = $.1 or 10 cents. meaning that each unit produced covers $.1 or 10 cents of the fixed costs.

**Answer -(E) Its marginal cost is $6, and its average variable cost is $5.50**

Understand that this is a perfectly competitive firm in long-run equilibrium,

this means that P=MC & P = min ATC

Total revenue is $600 and TR = P x Q

Quantity = 100 so Price must be $6

So if P = $6 then MC must equal $6 as P=MC

If P = min ATC then ATC at this level of production = $6

AFC = FC/Q

So, AFC = $50/100 = $.50 or 50 cents each unit

If ATC = AFC + AVC

&

ATC $(6) = AFC$(.50)

and ATC - AFC = AVC

Then AVC = $6 - $.50 = $5.50

**Answer - (D) $400**

AVC = VC/Q

Q = 5

then ?/5 = an AVC of $100

VC = 500

**500/5 = AVC $(100)**

now,, with output of one more unit #6, AVC increases to $150

AVC = VC/Q

Q = 6

AVC = $150

so, ?/6 = $150

**900/6 = AVC $(150)**

&

900 = VC at output of 6 units

500 = VC at output of 5 units

MC = change in VC/ change in Q (output)

**Change in VC = 400/ change in output = 1 unit**

**400/1 = 400**

**Answer - (D) Output increases at an decreasing rate, **

**and the cost of producing each additional unit of output increases**

Understand that the College Board is trying to see if you recognise the effect of adding more labor (variable costs) to a fixed factor of production (factory)

Diminishing Returns/Productivity

As you add more inputs (labor, variable costs)

to a fixed factor of production (factory, machinery)

revenues/output increase at a increasing rate initially, but at some point revenues/output decrease decrease the rate of increase, and will eventually decrease.

**Answer - (E) Economic profits are zero because price equals average total cost**

AVC = $35

AFC = $30

ATC = $65 & P = $65 & MC = $65

Long-Run Equilibrium = P=MC=ATC

at LR Equilibrium a firm is making zero economic profit

**Answer - (D) Average revenue is less than average variable cost**

Understand and draw your graphs with your Demand curve labelled the AR curve.

IT is,,, and therefore will make sense once drawn.

**Answer - (E) greater than zero**

Understand that if total revenue is increasing as output increases we must be operating in the elastic section of the demand curve.

As the lower section of the demand curve (that is where MR is negative) is inelastic