TUTORIAL 4

Topic: Production and Costs

1. The marginal cost (MC) and average total cost (ATC) curves intersect where:

a. AVC is at its minimum.

b. ATC is at its minimum.
c. MC is at its minimum.
d. Both A and B are correct.

2. Total profits are defined as:

a. Total revenue minus total costs.

b. Price times quantity minus the sum of fixed and variable costs.
c. The value of sales minus total cost of production.
d. All of the above.

3. Suppose that a business incurred implicit costs of €200,000 and explicit costs of
€1 million in a specific year. If the firm sold 4,000 units of its output at €300 per
unit, its accounting profits were:

a. €100,000 and its economic profits were zero.

b. €200,000 and its economic profits were zero.
c. €100,000 and its economic profits were €100,000.
d. Zero and its economic loss was €200,000.

4. To economists, the main difference between “the short-run” and “the long-run” is
that:

a. The law of diminishing returns applies in the long-run, but not in the short-run.
b. In the long-run, all resources are variable, while in the short-run, at least one
resource is fixed.
c. Fixed costs are more important to decision making in the long-run than they are in
the short-run
d. In the short-run, all resources are fixed, while in the long-run, all resources are
variable

5. The following is output data for a firm. Assume that the amounts of all non-labor
resources are fixed
 Number of workers Units of output
0 0
1 40
2 90
3 126
4 150
5 165
6 180

Refer to the above information. Diminishing returns become evident with the
addition of:

a. the fourth worker

b. the third worker
c. the second worker
d. the first worker

6. The following is the total and marginal product for a firm

Number of workers Total product Marginal product

0 0 --
1 8 8
2 10
3 25
4 30
5 3
6 34

Refer to the above information. When 2 workers are employed:

a. total product is 18
b. total product is 20
c. average product is 10
d. total product cannot be determined from the information given

7. Assume that is the short-run, a firm which is producing 100 units of output has
average total costs of €200 and average variable costs of €150. The firm’s total
fixed costs are:
a. €5000
b. €500
c. €0.5
d. €50

8. Average fixed cost (AFC):

a. is intersected by marginal cost at its minimum point

b. ma be found for any output by adding average variable cost and average total cost
c. graphs as a U-shaped curve
d. declines so long as output increases

9. The table below shows the total production of a firm as the quantity of labor
employed increases, with all other factors of production remaining constant

Number of labor Total product (TP)

0 0
1 80
2 200
3 310
4 400
5 450
6 480
7 490
8 480

a. Calculate the marginal product (MP)

b. Define the laws of diminishing returns. Is the MP calculated in part a) consistent
with the law of diminishing returns?

10. Given the following data for a firm:

Quantity of output TFC (€) TVC (€)

0 200 0
 1 200 50
2 200 90
3 200 120
4 200 160
5 200 220
6 200 300
7 200 400
8 200 520
9 200 670
10 200 900

a. For each of the levels of outputs shown above, calculate the following:
i) total cost (TC)
ii) average fixed cost (AFC)
iii) average variable cost (AVC)
iv) average total cost (ATC)
v) marginal cost (MC)

b. Sketch the graph showing the relationship between AFC, AVC, ATC and MC

c. If TFC increased by €100 what would happen to AFC, AVC, ATC and MC?

d. Why is MC the same when computed from TVC and TC?

11. The following production function relates to a small firm that incurs fixed costs of
€100 and labor costs of €10 per hour

Labor hours Total product (Q,

in units)
1 6
2 14
3 26
4 34
5 40
6 44
7 46
8 46
9 42
10 30

a. For each of the output levels shown above calculate:

i) Marginal product (MP)
ii) Total variable cost (TVC) and total cost (TC)
iii) Marginal cost (MC), average variable cost (AVC) and average total
cost (ATC)

b. For the above data, over which output range do we observe diminishing
returns?