Week (14): Exercise Sheet

Question (1): Multiple Choice Questions:

1- Which of the following is NOT considered as variable input?

a- Temporary workers
b- Building
c- Raw materials
d- Water and gas bills

2- Caribbean Constructions is planning to expand a complex of resort condos in the

Bahama Islands. Which of these is a fixed cost for their project?
a- Land for the new buildings
b- Concrete to build on the new site
c- Paint for the new condos
d- Windows for the new condos

3- Which of the following is a variable cost?

a- Interest payments
b- Raw materials costs
c- Property taxes
d- All of the above are variable costs.

4- Which of the following is an example of fixed cost?

a- Wages of temporary workers
b- Rent for factory space
c- Raw materials
d- Electricity bill
5- If Total Variable Cost and Total Fixed Cost of Producing 10 Units Are 500 and 200,
the Value of Average Total Cost Would Be?
a- 50
b- 70
c- 20
d- 80

6- A firm is operating with a Total Variable Cost of Rs 500 when 5 units of the given
output are produced and the Total Fixed Costs are Rs 200, what will be the Average
Total Cost of producing 5 units of output?
a- Rs 140
b- Rs 100
c- Rs 120
d- Rs 300

7- With fixed cost of $400, a firm has an average total cost $3 and an average variable
cost of $2.50. It’s output is
a- 200 units
b- 400 units
c- 800 units
d- 1600 units

8- Marginal cost refers to addition to the total cost when one more unit of output
is__________.
a- Wasted
b- produced
c- Employed
d- Sold
 9- Cost schedule is given as:
Output (in 6 5 4 3 2
units)
Total Cost 120 75 55 45 40
($)

In the given case, marginal cost at 4th level of output will be:
a- 10
b- 5
c- 45
d- 20

10- The curve in the following diagram is the most similar to a typical:

a- Total Variable Cost Curve

b- Marginal Cost Curve
c- Total Cost Curve
d- Average Variable Cost Curve
11- A firm producing 6 units of output has average total cost of Rs. 150 and has to pay
Rs. 240 to its fixed factors of production. In the given case, average variable cost
at 6 units of output will be:
a- Rs. 150
b- Rs. 900
c- Rs. 110
d- Rs. 1,440

12- Which cost increases continuously with increase in production?

a- Average cost
b- Marginal cost
c- Variable cost
d- Fixed cost

13- Which of the following statements is true?

a- ATC = AFC-AVC
b- AVC = AFC + ATC
c- AFC = ATC + AVC
d- AFC = ATC-AVC

14- If a Firm produces zero output in the short period, then:

a- Total Cost will be zero
b- Variable Cost will be positive

c- Fixed Cost will be positive

d- Marginal Cost will be positive
15- Identify the two cost curves which start from the same point on the Y-axis:
a- TVC and TFC
b- TFC and AVC
c- TFC and TC
d- TFC and AFC

16- Which curve is not affected by fixed cost?

a- MC Curve
b- TC Curve
c- AC Curve
d- AFC Curve

17- Average fixed costs:

a- Remain same at all levels of output
b- Increase as output increases
c- Decreases as output increases
d- Initially increases and then decreases

18- The shape of total fixed cost curve is:

a- U-shaped
b- Downward sloping
c- Inversely S- Shaped
d- Horizontal straight line parallel to x-axis

19- The cost which is never zero even when production is stopped is known as:
a- Fixed Cost
b- Prime Cost
c- Explicit cost
d- Implicit cost
20- When change in total cost is divided by change in output, we get:
a- Average cost
b- Total variable cost
c- Marginal cost
d- Average variable cost

21- A firm has a variable cost of $1,000 at five units of output. If fixed costs are $400,
what will be the average total cost at five units of output?
a- $280
b- $80
c- $200
d- $1400

22- A firm’s average fixed cost (AFC) is $20 at six units of output. What will be AFC at
four units of output?
a- $20
b- $30
c- $40
d- $50

23- The total cost at 5 units of output is $30. The fixed cost is $5. The average variable
cost at 5 units of output is:
a- $25
b- $6
c- $5
d- $1
24- The average fixed cost at 4 units of output is $20. Average variable cost at 5 units
of output is $40. Average cost of producing 5 units is: (Choose the correct
alternative)
a- $20
b- $40
c- $56
d- $60

25- If a firm’s production department data says that the TVC for producing 8 units and
10 units of output is $2,500 and $3,000 respectively, marginal cost of 10th unit
will be:
a- $100
b- $150
c- $500
d- $250

26- What is the total cost of production when fixed cost is $200 and variable cost is
$300?
a- $500
b- $100
c- $300
d- $200

27- Which of the following is true about total cost?

a- Total cost includes only variable costs.
b- Total cost includes both fixed and variable costs.
c- Total cost does not include fixed costs.
d- Total cost is equal to variable cost.
 28- When output increases, which cost tends to rise?
a- Marginal cost
b- Average cost
c- Total fixed cost
d- Total cost

29- If the total cost of producing 5 units is $200 and the total cost of producing 6 units
is $220, what is the marginal cost of the 6th unit?
a- $40
b- $20
c- $30
d- $10

Question (2):

1- Consider a bakery that produces cakes. It costs $10 in raw materials, $20 in utility
and $35 in labor to additional bakers working in peak hours, $20 in rent. Calculate
the fixed cost, variable cost and total cost of production.

2- Given below is the cost schedule of a firm. Its total fixed cost is Rs.100. Calculate
average variable cost and marginal cost at each given level of output.

Output (units) TC ($) FC ($) VC ($)

1 350 100 250
2 450 100 350
3 610 100 510
4 820 100 720
3- Draw total variable cost, total cost and total fixed cost curves in a single diagram, and
explain the figure.

Solution:

Question (1):

1- B
2- A
3- B
4- B
5- B, The formula for Total cost of production is = Total variable cost + Total fixed
cost

= 500 + 200

= 700

The average cost will be = Total cost of production / Total number of units

= 700/ 10

= 70.

6- A, The formula for Total cost of production is = Total variable cost + Total fixed
cost

= 500 + 200

= 700

The average cost will be = Total cost of production / Total number of units

= 700/ 5

= 140.
 7- C, 𝐴𝑇𝐶 = 𝐴𝐹𝐶 + 𝐴𝑉𝐶,

𝐴𝐹𝐶 = 𝐴𝑇𝐶 − 𝐴𝑉𝐶 = 3 − 2.50 = 0.5.

𝐹𝐶 400
𝐴𝐹𝐶 = = = 0.5.
𝑄 𝑄

𝐹𝐶 400
𝑄 = 𝐴𝐹𝐶 = = 800 𝑢𝑛𝑖𝑡𝑠.
0.5

8- B
9- A
10- C
11- C
12- C
13- D
14- C
15- C
16- A
17- C
18- D
19- A
20- C
21- A
22- B
23- C
24- C
25- D
26- A
27- B
28- D
29- B
Question (2):

1- 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 (𝐹𝐶 ) = 𝑅𝑒𝑛𝑡 = $20.

𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 (𝑉𝐶 ) = 𝑅𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 𝑢𝑡𝑖𝑙𝑖𝑡𝑦 + 𝑙𝑎𝑏𝑜𝑟 = 10 + 20 + 35 = $65.

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 (𝑇𝐶 ) = 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 (𝐹𝐶 ) + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 (𝑉𝐶 ) = 20 + 65 = $85.

2-

Output (units) TC ($) FC ($) VC ($) AVC ($) MC($)

1 350 100 250 250 -

= 250
1

2 450 100 350 350 450 − 350

= 175
2 = 100

3 610 100 510 510 610 − 450

= 170
3 = 160
4 820 100 720 720 820 − 610
= 180
4 = 210

𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 250

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 (𝐴𝑉𝐶 ) = = = $250.
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 1

𝜟𝑻𝑪
𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 (𝑀𝐶 ) = 𝜟𝑸
3-

(i) TC is the sum of TVC and TFC.

(ii) TC and TVC curves are parallel to each other.
(iii) TFC curve is parallel to x-axis. TFC is constant at all levels of output. TVC is zero at zero
level of output and with increase in output, TVC also increases. Therefore, TC also
increases.