TUTORIAL: CHAPTER 9- PART 1 MEMORANDUM

COMPLETE THE TABLE BELOW: (SHADED CELLS ARE THE VALUES PROVIDED WITH THE QUESTION)

Production Total Cost (R) Average Cost (R) Marginal Cost (R)

(Units) (Q)
1 10 10 10

2 30 15 20
.(30 = 15 × 2)
3 36 12 6
𝐱−𝟑𝟎
.(𝟑𝟔 ≫ 𝟔 = )
𝟑−𝟏

4 40 10 4
.(40 = 10 × 4)
5 42.5 8.5 2.5

6 45 7.5 2.5
𝑥−42.5
.(45 ≫ 2.5 = )
6−1

(a) Illustrate AC and MC graphs.

Average and Marginal Cost

25
20
20
15
COST (R)

15 12
10 10
8.5
10 7.5
6
4
5 2.5 2.5

0
0 1 2 3 4 5 6 7
Axis Title

AVERAGE COST (R) MARGINAL COST (R)

 (a) What is the difference between explicit cost and implicit cost?

EXPLICIT COSTS IMPLICIT COST

> Explicit costs are the monetary payments for the > Implicit costs are those opportunity costs which
factors of production and other inputs bought or are not reflected in monetary payments.
hired by the firm.
Examples include Labour, materials, electricity, Example: Money that could have been received by
transport services, advertising, business insurance the firm or the individual if they produced an
etc. – Payments made for use of resources owned by alternative product or interest that could have been
others e.g., rental costs, interest payments on loans, accumulated on an investment or savings plan that
leasing etc. has been cashed out.
(b) What is the difference between accounting profit and economic profit?

Accounting Profit is the profit that a firm makes and calculated by only subtracting Explicit Costs,
whereas Economic profit is calculated by taking total revenue and subtracting Explicit costs +
implicit costs.

Accounting Profit: Total Revenue- Explicit Costs

Economic Profit: Total Revenue- Implicit cost + Explicit Costs

(c) When does a firm realize normal profit.

A firm realizes normal profit where Total Revenue = Total Costs (TR = TC) Another term for this is:
“breaking even”

(d) What is the difference between economies of scale and diseconomies of scale?

Economies of scales refers to when a firm experiences a decrease in cost per unit output, but the
scale of production (output) increases and diseconomies of scale refers to when a firm is
experiencing an increase in cost per unit as output increases.
(F) Draw the Long-Run Average Cost curve.

2. STATE IF THE NEXT STATEMENT IS TRUE/ FALSE:

(1) Economic costs of production are based on the principle of opportunity cost.

>> True

(2) When a firm's total revenue is greater than its total economic costs, the firm is earning an
economic profit.

>> True

(3) When a firm's total revenue is less than its total economic costs, the firm is earning a normal
profit only.

>> False, (If TR < TEC = the firm is experiencing an economic loss)

(4) Normal profit refers to a situation in which only explicit costs are covered.

>> False, (Normal Profit is when Minimum Profit is covering the firms’ economic costs. TR = TC)

(5) When a firm's total economic costs are less than its total revenue, it is incurring an economic
loss.

>> False (TEC < TR, Economic Profit)

 3. Answer the following questions:

a) Define the production function.

The production function indicates the amount/number of products or services which a producer
can produce (output) with a certain combination of production factors (inputs), given the current
technology.

b) How can firms increase production in the short run?

In the short run, A firm can only expand its output by increasing the quantity of the variable input.
(Hire more workers, Increase work hours etc.)

c) Complete the Table below:

UNITS OF LABOUR (N) TOTAL PRODUCT (TP) (TON) AVERAGE PRODUCT MARGINAL PRODUCT (MP)
(AP)(TON) (TON)

0 0 ----- -----

1 12 12 12

2 40 20 28

3 75 25 35

4 108 27 33

5 125 25 17

6 132 22 7

7 126 18 -6
 4. Use the table below to answer the following questions:

Units Total Fixed Total Total Cost Average Average Marginal

Produced Cost (R) Variable (R) (Total) Cost Variable Cost (R)
(Q) Cost (R) (R) Cost (R)
0 300 0 300 0 0 0

1 300 500 800 800 500 500

2 300 1050 1350 675 525 550

3 300 1650 1950 650 550 600

4 300 2900 3200 800 725 1250

5 300 4000 4300 860 800 1100

(ii). Draw the graphs of TFC, ATC, AVC & MC on a single x-axis curve.

TFC, ATC, AVC AND MC

4500
4000

3500
3000
COST (R)

2500

2000

1500
1000

500
0
0 1 2 3 4 5 6
UNITS PRODUCED (Q)

TOTAL FIXED COST AVERAGE TOTAL COST

AVERAGE VARIABLE COST MARGINAL COST
iii. Illustrate the graphs for TFC, TVC and TC and explain the relationship.

TOTAL COST CURVES

5000

4500 4300

4000
4000
TOTAL COST (IN RANDS)

3500 3200

3000

2500 2900
1950
2000
1350
1500
1650
1000 800
1050
500 300
500

0
0 1 2 3 4 5 6
UNITS PRODUCED (Q)

TOTAL FIXED COST TOTAL VARIABLE COST TOTAL COST

The relationship between TFC, TVC AND TC:

>>Total Fixed Cost Curve is fixed and therefore the graph is horizontal. (R300)

>> Total Variable Cost Curve increases and intersects with TFC at a point.

>> Total Cost Curve is the sum of TFC and TVC. (It is greater than both of them, individually)

Tip: Do not forget to label the x-axis and y-axis.

 5. Complete the table below by calculating the missing data

Q Total Fixed Cost Total Variable Total Cost Average Fixed Average Average Total
Cost Cost Variable Cost Cost
0 R300 R0 300 ----- ----- -----

1 R300 R75 375 300 R75 375

2 R300 R120 420 150 60 210

3 R300 R150 450 100 50 150

4 R300 R360 660 75 90 165

5 R300 R600 900 60 120 180

5.1 Graph the per unit (last three columns) cost curves for the table above.

AFC, AVC AND ATC

400 375

350
300
300

250
210
COST (R)

200 180
165
150 150
150 120
100 90
100 75 75
60 60
50
50

0
1 2 3 4 5

QUANTITY (Q)

AVERAGE FIXED COST (R) ----- AVERAGE VARIABLE COST (R) ----- AVERAGE TOTAL COST (R) -----
5.2 Explain what would happen to the per unit cost tables if total fixed cost went up by R50.

If fixed costs went up by R50, this would cause an increase in the total cost per unit of the firm,
thus causing an increase in the average fixed costs and ultimately the average total costs.

5.3 Explain what would happen if variable cost went up by R30 at every level of production
starting with unit 1.

Each additional unit produced would incur an additional cost of R30 compared to the previous
level. This means that the variable cost per unit would rise by R30 with each unit produced. the
increase in variable cost would directly impact the profitability of the business. Profit is calculated
by subtracting the total cost (including variable costs) from the total revenue generated.

5.4 Graph the average cost and average variable cost curves from numbers 3 and 4 above