2013 Nov (Output/Costs/Revenues) Paper 3 HL

2013 Nov (Output/Costs/Revenue) 

Paper 3 HL

(a)   Outline the difference between fixed and variable costs of production.

 

Variable Costs – change with changing output (think labor) while,

Fixed costs do not change when output changes (think rent).

 

If you produce more you must hire more labor but no matter if you produce 1 taco or 10,000 tacos your rent for the month will not change.

 

(b)  (i) Using the data in the table below, determine the MP for the different quantities of labor employed and complete the MP column in the table.

(ii) Using the data in the table in part (b) (i) draw a graph to show the relationship between marginal product and labor input. The axes and curves must be labeled.

(iii) On the graph, identify where diminishing returns set in. (3^rd worker)

Vertical Axes may be (MP, Marginal Product, Output, quantity)

Horizontal Axes may be (Number of workers, Labor, L or QL)

MP points may be above or between the units of workers.

 

(C) State the equation used to calculate Average Total Cost: Marginal Cost

(ii) Using the data in the table, determine the marginal cost and average total cost figures for the different quantities of total product and complete the MC and ATC columns.

Recognize that when the output is 0 (zero) and there are Costs they must be fixed costs as with no production VC are zero.

FC is constant so the same all the way down

VC = TC – FC

MC = Change in TC/Change in Quantity   With 1 unit of labor (4.8  = 24/5)

ATC = TC/Q

AFC = FC/Q

AVC = VC/Q

 

(iii) Using the data in the table in part (c) (ii), draw a graph to show the firm’s average total cost curve. Axes and curves must be labeled.

Horizontal Axes (Output or Quantity of shoes)

Vertical Axes (Costs, average (total) costs, $)

 

(iv) Define the term Productive Efficiency

 

Productive Efficiency = P = Minimum of the ATC

Where a firm produces at the lowest unit or average total cost

(or where MC = ATC)

 

(d)  Explain how the law of diminishing returns affects this firm’s marginal costs.

 

If MP decreases then MC’s increase and vive versa and as input increases (labor) the resulting increases in output become smaller. As a result, the additional cost of one more unit of output (the MC) will begin to increase.

(e)  Explain one possible source of economies of scale that this firm might benefit from if it increases its scale of production.

2013 (Output/Costs/Revenues) Paper 3 HL

2013 (Output/Costs/Revenues) 

Paper 3 HL

(a)  Complete the table above by entering the total revenue (TR), average revenue (AR), marginal revenue (MR) and the marginal cost (MC information for all levels of output.

Total Revenue = P x Q

Average Revenue = TR/Q

Marginal Revenue = Change in TR/ Change in Quantity

Marginal Cost = Change in TC/ Change in Quantity

(b)  (i) Using your answers from part (a), identify the profit maximizing level of output for the firm. You must outline the reason for your answer.

 

Profit max = MR = MC

Profit  = TR – TC

Max Profit is where the profit gained between TR and TC is the greatest.

The amount of profit gained between TR and TC with the 3^rd unit of production is $60 (120 – 60) or the 4^th unit of production $60 (140 – 80).

Either the 3^rd or the 4^th unit of production is where profit is maximized.

(iii) Calculate the economic profit/loss, which the firm would make at this level of output.

 

3 units produced TR – TC = Profit, So, 120 = 60 = $60 profit

4 units produced TR – TC = Profit, So, 140 – 80 = $60 profit

 

(d) The graph below illustrates the average total cost and average variable cost information for a firm.

 

On the graph, identify the break-even price and the shut down price for a perfectly competitive firm.

-       Drawing a horizontal line tangent to the lowest points on the AVC & ATC curves

-       Indicating the correct values or positions on the vertical axis (Break even = $7.60) & (Shut down = $6)

(e) (i) Calculate the Total variable cost if output is 50 units per month.

(e) (ii) Calculate Total Cost if output is 30 units per month.

(f) With reference to the graph in part (d), explain the difference between the break-even price and the shut down price.

Break-even price is the price at which a firm is able to just cover its average total costs while the shut down price is the price at which the firm is just able to cover its average variable costs. & In the short run a firm may stay in business even if the price is below the break-even level provided that it is greater than or equal to the minimum average variable cost so that it makes a contribution toward (covers) its fixed costs.