ECONOMICS (ECO415)

Theory of Production and Cost

Date: 9.10.2019
Group: CS249 1A and CS245 1A & 1B

1. A firm can vary the amounts of some, but not all, of its factors of production when it is
producing in a ____________ time frame.

2. Factors of production that cannot be changed in amount over the short run are
____________ factors, and their costs are ___________ costs, Factors that can be changed
in amount over the short run are ____________ factors, and their cost are ___________
costs.

3. The behaviour of short-run costs is governed by the Law of __________________________.

According to this law, as additional units of a variable factor are added to a
________________, beyond some point the additional product from each additional unit of
the variable factor will __________.

4. In the long-run time frame, all factors of production are ____________, and therefore, all
costs are ____________.

5. Generally, as the level of output increases, long-run average total cost ____________ ,
reaches a minimum, and then ____________.

6. Aisyah bakes and decorates large, elaborate, multi-layered, special occasion cakes. She
produces these in her own home without any help, unless she has a large number of orders
on a particular day.

a) Given the following information, complete the Table below, which lists the various costs
for producing from 0 through 8 cakes per day.
- The total cost of producing 5 cakes is RM 135
- Total fixed cost for 1 cake is RM25.
- The marginal cost of the 8th cake is RM91.
- The average total cost per cake when 3 cakes or when 4 cakes are made is RM25.
- The total variable cost of producing 7 cakes is RM220.
- The marginal cost of the 6th cake is RM45.
- The total cost of 2 cakes is RM60.
- The total variable cost of 1 cake is RM25.

Number Total Cost Total Fixed Total Variable Average Total Marginal Cost
of Cakes Cost Cost Cost
0
1
2
3
4
5
6
7
8
b) If Aisyah can sell from 0 through 8 cakes at RM40 each, how many will she choose to
produce and sell per day if she is trying to maximize her profit?

c) Sketch the Total Cost, Total Fixed Cost and Total Variable Cost of the firm.

d) Complete the Table below to check your answer to question b). Do the numbers in the Total
Profit column and in the Marginal Revenue and Marginal Cost columns support your
answer?

Number Total Revenue Total Cost Total Profit Marginal Marginal Cost
of Cakes Revenue
0
1
2
3
4
5
6
7
8

d) Using the Marginal Revenue and Marginal Cost approach, sketch a diagram to show the
equilibrium output.

End of Questions