2012 Multiple Choice (Output & Costs)

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