2018 Nov (Output/Costs/Revenue) Paper 3 HL

2018 Nov (Output/Costs/Revenue) Paper 3 HL

1.     Firm A produces cartons of coffee. Figure 1 illustrates the firms total cost (TC) and variable cost (VC) at different output levels per month.

 

(a)  (i) Calculate Firm A’s average fixed costs when it is producing 125 cartons of coffee per month.

Recognize that the vertical distance between the TC & VC curve is the FC.

 

            Quantity of 125

TC = 2000

VC = 1500

TC – VC = FC

2000 – 1500 = 500 (FC)

 

The question is asking for Average Fixed Costs (AFC)

AFC = FC/Q

 

500/125 = 4 (AFC)

(ii) Calculate a Firm A’s average variable cost (AVC) when it’s producing 125 cartoons of coffee a month.

Quantity  = 125

VC = 1500

AVC = VC/Q

 

AVC = 1500/125 = 12 (AVC)

(b) (i) Using Figure 2, calculate the AFC when 80 cans per month are produced.

AFC is the vertical distance between the ATC & the AVC curves.

Quantity produced 80

ATC = 25

AVC = 20

AFC = ATC – AVC

 

AFC 5 = 25 - 20

 

 

(ii) Using Figure 2, Calculate the Total costs when 55 cans per month are produced.

The output is 55 cans so the ATC is 30

 

TC = ATC x Q

$1650 = 30 x 55

(iii) Explain why in the short-run, as output increases, marginal costs typically dccrease and then increase.

 

The Marginal Product initially tends to increase due to specialization, but then because of a fixed input (Factor of production, Fixed Capital) diminishing returns causes the MP to eventually fall and increasing the Marginal Costs.

 

The price of tea in the perfectly competitive tea market is presently $21 per can.

 

(c)  (i) Using this information, draw and label the average revenue curve on Figure 2.

(ii) Using Figure 2, identify the quantity of cans per month Firm B must produce

on order to maximize profits.

 

Profit Max = MR = MC

Profit Maximizing Output Level = 105

(iii) Calculate the economic profit when Firm B is producing at the output level 

identified in part (c)(ii).

If P < ATC = Loss

P – ATC (Q) = Loss

21 – 23 = 2 x 105 = -210

(d)  Sometimes a firm continues to produce in the short-run, even when it is making economic losses. Explain why.

 

In the short-run, the firm should continue to produce as long as the price covers (Average) variable costs, since it’s making a contribution to its fixed costs,

Or,

The firm’s losses are less than its fixed costs, so its losses would be greater if it was to shut down.

 

Shut-Down Point is where P = Minimum of the AVC

If the Price = the minimum of the AVC, then no fixed costs are being covered and if the price falls even lower then VC (labor) will not be able to be paid.

 

If my rent (a fixed cost) is $500 a month and my losses are $250 should we shut-down?

The answer is no because as long as I’m running my business I’m at least making (covering) $250 that can be paid toward my rent. If I shut down I owe the whole $500 for the rent.

 

Understanding – Even when making a loss I might want to keep operating as long as I’m covering some of my fixed costs (rent). If I can’t pay any of my fixed costs (rent) from running the business it’s best for the business to be shut-down.

(e)  Outline why a perfectly competitive firm is a price taker.

 

If the firm raises its price both the quantity sold and revenue will drop to zero and there is no reason to lower its price as it can sell all it wants at the market price.

2019 (Output/Costs/Revenues) Paper 3 HL

2019 (Output/Costs/Revenues) Paper 3 HL

(i)            Draw and label the Marginal Revenue (MR) curve for the concert on Figure 3.

(j) Calculate the maximum revenue that can be earned from selling tickets for the concert.

Max Revenue output is where MR = 0

 

The monopolist can choose its output or its price but not both.

 

The Max Rev output is 30,000 therefore the price must be 150

 

150 x 30,000 = $4, 500, 000

The fixed costs for the concert have been calculated as $3 million, while it’s expected that there will be no variable costs.

 

(k) (i) Calculate the average fixed costs per ticket if all tickets are sold.

 

40,000 tickets are available

Understand that a monopolist can choose its price or quantity but not both.

If they want to sell all 40k tickets the monopoly will price them at $100 each,

But they will only make 40,000 x $100 = 4,000, 000.

 

Quantity of tickets = 40,000

 FC = 3 million

AFC = Fixed Costs/Quantity sold

 

3m / 40k = 75

 

(i)            Assuming that event organizers aim to maximize profit, calculate the profit that will be made from the concert.

 

Profit Maximization is where MR = MC

 

In this instance there are no Variable costs therefore no Marginal Costs

Therefore MC = 0

Total Revenue (P x Q) = 30,000 x $50 = 4,500,000

Total Costs = FC = 3,000, 000

Profit = TR – TC

1,500,000 = 4,500,000 – 3, 000,000

2016 (Monopoly) Paper 3 HL

2016 Monopoly Paper 3 HL

(c) (i) If fixed costs are $800,000 per month, calculate the total variable costs at a monthly output of 140,000 units.

Total Costs = 140,000 x 18 = 2,520,000

Fixed Costs = $800,000

TC - FC = VC

2,520,000 - 800,000 = $1, 720,000

(ii) Outline the difference between the explicit and implicit costs of production.

Explicit Costs = anything you spend money on (all FC & VC)

Implicit Costs = Opportunity Costs, sacrifice of income arising from the use of a resource owned by the firm

(iii) Define the term Normal Profit.

• Level of profit which is just sufficient to keep a firm in business
• Covering implicit costs = Accounting profit is positive
• The return which could have been earned from the next best alternative

(d) (i) Calculate the economic profit made by the cartel if the members jointly supplied 50,000 units per month.

Profit

 = Q(AR - ATC) or Q(P - ATC)

 = 50,000 (16-12)

 = $200,000

(ii) Identify the level of output which would maximize revenue for the cartel.

Revenue is maximized where the MR = 0 = Output (90,000)

(iii) Calculate the value of total revenue per month for members of the cartel if they produce at the revenue maximizing level of output.

The Revenue Maximizing output level is 90,000 units, the price at 90,000 units is $11.

Total Revenue = P x Q

$11 x 90,000 = $990,000

2013 Nov (Multiplier) Paper 3 HL

2013 Nov (Multiplier) Paper 3 HL

(c) (i) Using the data in table 2, calculate the value of the Keynesian multiplier in South Korea.

1/ (.3 + .3 + .2) = 1.25

(ii) Using the multiplier calculated in (c) (i), calculate the change in South Kore’s real GDP brought about the rise in its exports from 2009 to 2010.

 

Change in exports = $448b - $412b = $36b

 

$36b x 1.25 = $45b

 

(iii) On the axes below, draw an appropriate AD/AS diagram and use it to explain the impact on South Korean RGDP of the change in South Korean exports from 2009 to 2010.

As exports increase aggregate Demand increases thus leading to an increase in real GDP.

2014 May (Multiplier) Paper 3 HL

2014 May (Multiplier) Paper 3 HL

(e) In country Z, for each additional $1 of income earned, 4 cents ($0.04) is saved, 15 cents ($0.15) is taken as tax and 6 cents ($0.06) is spent on imported goods and services.

Calculate the value of the multiplier in country Z

 

1/ (.04 + .15 + .06)  = 4 Value of the multiplier in Country Z.

(f) (i) The government of Country Z intends to increase government spending in order to increase GDP by $950 million. Using your answer to (e), calculate the increases in government spending needed to bring about the desired change in GDP.

 

$950m /4 = 237,500,000

 

(ii) Sketch an AD/AS diagram to show the impact of the multiplier.

AD is where we start, then gov’t-spending gets the GDP to AD1 then with the multiplier effect AD shifts to AD2.

 

Vertical axis (PL, APL, CPI, GPL)

Horizontal Axis (GDP, Real Output, Real Income, RGDP or Y)

 

(g) Explain the multiplier process, which will cause the final increase in GDP to be different from the initial increase in government spending.

 

Spending by one person represents income to another. Thus an increase in government spending leads to a series of additional increases to income. Therefore the eventual increase in GDP will be greater than the initial increase in government spending.

2018 (Multiplier) Paper 3 HL

2018 (Multiplier) Paper 3 HL

(g)

(i) Calculate the maximum possible increase in GDP that could result from the rise in investment.

 

Multiplier = 1/1-MPC

 

Marginal Propensity to Consume = the proportion of additional income used for consumption

 

MPC = .8

So 1/1-.8 = 1/. 2 = 5 is the Multiplier

 

Investment increases by 2b x 5 = 10b increase in GDP

(ii) Country Delta is an open economy with a government sector. Investment rises by $2 billion in both Delta and Beta. Explain how the size of the multiplier and the resulting effect on GDP might be different in the two countries.

 

Beta is a closed economy with no government sector

 

Delta is an open economy with a government sector and has more leakages

as (imports & income taxes) occur in economies with open sectors with a government

 

An increase in investment will increase RGDP by smaller amounts as a greater proportion is withdrawn before additional spending takes place.

 

The effect on RGDP in Delta will be smaller than in Beta.

2019 May (Multiplier) Paper 3 HL

2019 May (Multiplier) Paper 3 HL

(I)  Using this information, calculate the value of the Keynesian multiplier.

 

Citizens spend 10% on imported goods = MPM = 10% = .1

Citizens pay a tax rate of 20% = MPT = 20% = .2

Citizens have a marginal propensity to save of 10% = MPS = 10% = .1

1/. 4 = 2.5 = Multiplier

 

(j) Using your answer to part (I), calculate the increase in government spending necessary to increase nominal GDP by $100 billion.

 

NGDP/Multiplier = Amount of Gs.

100b/2.5 = 40b of Government Spending

 

Gs x Multiplier = NGDP increase

40b x 2.5 = 100b in NGDP