4.3 Production, Costs, Revenues and Profits TOPIC 4.3 —_ TOPIC 4.3 > PAGE1 Production, Costs, Revenues and Profits PAPERI Multiple Choice Questions 1. A firm's average revenue is $10. It sells 2000 units. ‘What is the firm's total revenue and the price of the product? reverses) | PHee® A 10 10 B 2000 200 c 20 000 10 D 20 000 200 {J06/P1/Q18] What is most likely to increase a firm's profits? A. government controls on its prices B grants for the purchase of new machines C an increase in the wages paid to its workers D rising costs of its raw materials {N06/P1/Q18) Which statement about fixed costs is correct? A. They exist only in the long run. B ‘They include raw material and direct labour costs. C They increase at the same rate as output. D_ They must be paid even if there is no output, [N06 /P11Q20] A British firm, Dyson, moved produc- tion of its vacuum cleaners from the UK to Malaysia. Why might it have made this change? 6. 1 8 ‘A average costs would fall B_ average revenue would rise © market share would fall D_ transport costs would rise [407/P11Q20) What is a fixed cost of production? A the commission paid to sales staff B_ the cost of using the telephone C the interest paid on a bank loan D_ the money spent on repairs (J07/P1/Q21 What is not equal to the average ‘revenue? the price of each unit the profit from each unit the revenue from each unit the total revenue divided by out- put vaowp (407/P1/Q22] In 2005, world oil prices increased significantly. What offect would an inerease in oil prices have on a firm that transports products for other firms? A average fixed costs would increase B_ profits would increase C total fixed costs would increase D_ variable costs would increase 1071 P11Q20] Which statement is correct? A. Average revenue is total revenue divided by output. B_ Fixed cost is total cost plus vari- able cost. Thinking $ A$ of units =102000 $20,000 TA of units 20,000 _ 510, 2000 Price 2B Grants will re duce the firm's cost of production, so profts will ‘ise. Price controls will reduce revenue causing Profits to fall, so not. op- tion A while both options and D wil increase firm's costs which will ‘most likely decrease prof its, 3. Fixed costs do not vary with the level of ‘output, They also exist in the short run, so. not ‘Option A while Options B: ‘and C describe variable costs, 4, A Production changes are likely to be made to reduce average costs, 5. © Interest char {gos are an example of 4 {ixad cost. Option A, \g ‘and D ate examples variable cost of produces tion,4.3 Production, Costs, Revenues and Profits TOPIC 4.3 2 PAGE 2 C Total cost is variable cost multi- A $1000 B $700 plied by fixed cost. © $500 D $300 D Total revenue is fixed revenue 14081711923) minus variable revenue, 1No7/P1/@21) 18 'The purchase of new machinery enables a firm to increase output 9 What is a firm seeking profit with fewer workers. maximisation trying to achieve? What is the effect on Inbour produe- ivi 2 A. the fastest rate of profit growth _tvity and total costs? B_ the highest level of profit per unit change in labour | change in total produced productivity costs C the highest level of total profit a ea constant D the lowest level of total cost c Ea Peeriam tno7/P11Q22] |p| uncertain fall [N08/P11@3) 10. An Economies student made the t ed following statements about costs of 14 Tho financial director of a company m a adds up the expenditure on items Average costs remain the same such as electricity, petrol (gas) and at all levels of output. diesel fuel and raw materials. The Fixed costs can exist when there director then divides that total by the is no output. firm’s output. ‘Total costs ean include both fixed What has the director calculated? andWariable costs A average revenue Total variable costs fall as erage fixed ent oa ies © average variable cost Hom many ofthese statements are) Syerage ttl cost 1N08/P1/Q20] Al B2 ee ee 15. A business aims to maximise 1408/P1/Q20] profits. 11. A Japanese company which has spare ‘To do this, it will have to capacity has agreed to refine 20000 A_maximise sales revenue. barrels of oil a day for a Chinese maximise the difference between PeOPany, sales revenue and production What is likely to happen in the Japa- costs, nese firm to fixed cost, to variable minimise 1 + mi production costs, cost and to total cost? a a ee D_ minimise the difference between asta [Einueal Walter actual production and maximum production, ‘Al rise rise rise [N08 /P1/Q21) B| rise fall |stay the samo C|stay the same| rise e 16, The following report appeared in D|stay the same| fall fall newspaper. 7J08/P11@22) ‘British American ‘Tobacco (BAT), the cigarette producer, said it 12, A firm sells its products for $10 each. would invest $1.5 million in It produces 100 unite. variable cost is $5 and fixed cost is $2. How much profit does the firm make from selling 100 units? average average China during the next two years ag it set up new factories. China is estimated to be the world’s most important market for the sale of cigarettes.” & B hve enue Is equa y per unit (ny enue per unt (oy, calolated a a vided by spa D) but not ca ne age pot (tere 1D Aneceey oil prices wil voy, fuel cost wticr variable cost fr: that transport gon for ters, a) toll cost minus, cost $0 not opt, Total cost is va cost plus fred ex not option © art revenue is fedex plus variable reve ‘otopéonD, 9 C The an prof maxnisatoors achieving the max (highest) level of profit 10.8 The fas ments incor st average costs hag! the level of outp? last statements es! correct a5 tna ve costs rise a5 ost! creases. So oth? statements ae ort 1G Anise ‘production wil have! fect on fixed cost? able costs wil causing toa css cease, 12D Average f enue (AR) =$10, 20% cost (AC) = $5420 Average. polit AR-AG= LT Total Proft (TP) output = aei? ‘4.3 Production, Costs, Revenues and Profits ‘What is likely to happen to the total cost, total revenue and profit of BAT? total total cost | Ot, | profit “(| decrease | inerense | uncertain B| decrease | decrease | increase C| increase | increase | uncertain D| increase | decrease | increase ([N08/P1/Q22] 17. How does a firm guarantee that it makes the maximum profit? A. by maximising the difference between its total revenue and total cost B by maximising the number of goods that it sells © by minimising the amount of goods that it keeps in stock D by minimising the difference between average revenue and average cost (09/P1/Q18) 18. Some travellers complain about the disturbance caused when other people use their mobile (cell) phones. As a result, a UK train operator announces that it will buy some new trains that will have a device fitted to prevent the use of mobile (cell) phones. What will definitely happen to the train operator? A. Its average revenue will decrease. B Its total revenue will increase. C Its fixed cost will increase. D Its total cost will decrease. [509/P1/Q19] 19. The diagram shows the fixed costs, variable costs and total costs of a firm. costs (S000) 605. 100 units: TOPIC 4.3 & PAGE 3 What is the firm's variable cost at fan output of 100 units? A $500 B $10 000 © $50000 =D $60 000 [4091 P11Q211 20. Cadbury Schweppes, the confection ery business, is reported to want to reduce the number of its offices in sn attempt to decrease its general and administrative costs. Which type of cost does Cadbury Schweppes hope to decrease? average variable cost marginal cost total fixed cost total variable cost [N09/P1/Q18) vouDp 21, ‘The table shows the total cost of a firm. It can sell the units for $4 each. [quantity produced (units)| 5 | 6 | 7 | 8 total cost $ 17| 18 | 21 | 23 How many units will the firm pro- duce to maximise profits? A5 BS6é c7 Ds (N09/P1/Q211 22. A firm has fixed costs of $20 and the following total variable costs. 10 40 20 | 30 80 40 100 ‘output total variable cost $ 60 What happens to average total cost over this output? It falls continuously. It falls, than rises. It rises continuously. It rises, than falls. [N09/P11Q22) vamp Thinking P10 5 Y mca answers 13. C Labour produc- tty vil ise as production increases with fewer work- ors. The extra machinery would Increase the fms costs but ths reduction in workforce would lower cost, Since the relative amounts of each change ‘are unknown, the change in total cost wil be uncer- tain, 14, C All these items are examples of variable costs so dividing these costs by total output ives average variable cost. 15, B Profit= revenue costs. 16. C Setting up new factories will certainly in- crease total cost and a large target market will increase total revenue. However, since the rela- tive change in total cost and total revenue is un- known, effect on profit is uncertain, 17 A Profit =Total revenue ~ Total cost 18. C The purchase of new trains will def- ritely increase the fixed cost of the train operator. The effects in Options A, B and D are relatively uncertain 19, © Atan output of 100 units, fixed costs are $10,000, variable costs are $50,000 and total costs are $60,000. 2. © General and administrative costs are clearly a fms fixed costs as they do not vary with the level of output. 21. D Profit = Rev- enue ~ cost where Rev- | enue = Price per unit x Quantity !4.3 Production, Costs, Revenues and Profits TOPIC 4.32 PAGE4 Think “eS 28. The diagram shows a market for 26, The table shows a firm's fixed and “Y" mcaan,, wheat that is in equilibrium. variable costs at four levels of output. os 1 output fixed | variable ] yy, i as A Total s units) | eosts($)_| eost5(8) | Fsed coat 2 60 110 costs " a x a an a0 Average cost = Tay, g JOutput ' 4 50 210 n 1. C Tolley 50 a w u 300) =pre(ON xa. 2 ‘Ab whlch level of oiitput is average ~ OV ° Y z cost at its lowest? 24. B Breahene quantity -? tx curs where toa Which area represents the total ee D5 iedoana i, ha revenue for wheat farmers? iv101P1/Q18] 66*20)vhichenzs | A OTXY B OVxZ 0 option B. Ave © ovxy D OWxY 27, In 2008, the world’s largest metal {lowest when 3 3 i0/Pt/ ea mining company, BHP, increased its %@ produced ($504, e Ee profits by 20%. pre oa Ag units Te 24, A‘irm which cll its product for $6 _-‘Whatcouldhave helped thet happen? $0 yah ope hhas the following total costs. A. adecrease in economic growth in finns fixed cos sa. Ti ae the UK and the US tion C. Total vari | stout (anit) || 0 B an increase in demand from _ inerease wih te b= total costs ($) | 40 | 100 | 120 | 150 China ‘output so not opt Ried cuits abet © more competition from other 25. D_ TotalCat ae companies Total Revenuo-Prt wwerage cost is lowest when 10 amare al conditions =$5on-$06tn 58 D_ more difficult mining conditions =$6/5 IN10/P1/Q23] B The firm breaks even when 20 2% 8B units are sold. 28, A firm raised the price of its product ayerage cost = 18855 C The firm has no fixed costs. from $10 to $15 and as a result its "Ont D_ Total variable costs fall continu- sales fell from 200 units to 150 units. TOMO ously over these outputs. What happened to its average Tev- average cos ist (J10/P1/Q171 enue and total revenue? Nowest ($60) when’, ot prota, 25, Barilla, an Italian company, is the average | total rever are world’s largest pasta maker. It also revenue ane. 2. B Higher dy produces bread. "Al .docreased & 4 is likely to resut nb» In 2006 its bread production contrib- nt eerie uted $1.5 billion (bn) to its total fB||Gcsdabreeied) :)/ increased at at ebe oe revenue of 5:1 be. Overall prt was ©| increased | decreased fre most He What was the total cost to Barilla of pl tarred | _inerensed es producing pasta and bread in 2006? 111111918) A $21bn — B_ $3.0 bn C $36bn =D $4.6 bn 14101P1/Q20) 29, If a firm increases its output in the short run, what will happen to its average fixed cost (AFC)? AFC will decrease continually. AFC will equal zero. AFC will increase then decrease. vawe AFC will increase continually. (411/P1/Q20)Thinking 4.3 Production, Costs, Revenues and Profits i TOPIC 4.3 © PAGES 3 mcaanswers 30. A major computer company ‘When would a firm achieve maximum announced that its profits had fallen below the level predicted. What might have caused this’ A Increased advertising costs that greatly improved sales. Low prices that made the company's product competitive. © New technology that reduced costs. B profits? A’ when average revenue equals average cost B when average revenue minus variable cost is greatest © when fixed costs are equal to variable costs D_ when total revenue minus total cost is grentest producing 5000 units? A the component parts of the 28. D- Totalrevenveis calculated by price xsales Initially revenue is $10 x 200 = 2000 and thon 15 x 150 = 2250. Change in total revenue isan increase of $250, ‘Average revenue ls cal D_ Reduced sales and low prices. 1J12/P11QI8) cuatedty, (J11/P1/Q22] 35, The table shows the total costs of a Price = Lola! revenue firm. It can \e UI th $1. The table shows how a firm's total sell the units for $4 each. aes cost rises with changes in output. —_[Guantity produced and sold ama [6]6]7]8 (e)-# Lewas totall cost (@) pees, 17/18 PF price has increased by 0 20000 How many units will the firm $5 (615-$10), So both 1000 30000 Produce to maximise profits? toll revenue and aver 2000 35000 A 5 B6 age revenue increased. Sie 400% oa Dae 29. A Average fixed 4000 A) {J121P1/Q21] costs are calculated by 5000 50000 = 36, What is a variable cost to a firm Toa hederss asout- What is the average fixed cost of producing bicycles? c ut increases, denomi- nator increases, thus ain B 46 bicycles AFC wil fall. Fixed costs c $6 D $10 B_ the interest on money borrowed are spread over a larger 1v111P1/Q20) © the rent of the bicycle factory quanliy/ouput D the salaries of the senior man- 99, D Prof is made 82. A firm is producing an output which enables it to make more than nor- mal profit. What must be true at that output? A’ Average revenue must be greater than total revenue. B Average revenue must equal (N11/P1/Q23) 37. agers (N12/P1/Q18) ‘The graphs show the average total cost (ATC) curves of four firms and how they change as output increases. Which firm has the highest fixed costs? Up of total revenue —Total costs. Generally, low Prices are expected to in- crease sales/revenue. However, there are re- duced sales. Hence their prediction is ikely to fal 31. A The average average cost. A B fixed cost is calculated C Total revenue must be greater ii innate ae xo: BES, Fd D Variable cost must equal price. cost cost cost ero $20,000 (when mvi1/p1iqez],—§ ‘output is zero, costs are | ATC, 20,000 which means 83. Which statement about total fixed © output 0 output fixed costs are $20,000). cost is correct? Output in this case are A It ut a 5000 units, therefore, falls as output increase c > Aachen tet incaate B It is calculated by adding total arc. (Wena | cost and total variable cost. = 75000 = 84 © iti - cost | Nis aoe by dividing total“ Ae 3 32. C Normal Profits > tut ; are earned when total rev- Je must be paid even ifoutput is gO aap enue exceeds total cost. IN12/P1/Q21] -4.3 Production, Costs, Revenues and Profits 38. Cocon and sugar are used in a factory to produce chocolate. What is a fixed cost in the production of chocolate? A. cocoa B_ olectricity © rent D_ sugar [131 P1/Q191 89, An entrepreneur buys a workshop for $200 000 to make plastic boxes, In the first year of operation he spends $70 000 on materials, employs ten production workers paid by the amount produced (piece rate) at a total cost of $80 000 and buys two delivery vehicles for $10 000 each. What are his total variable costs? A $100000 B $150 000 © $220000 D_ $370 000 (313/P11Q22] 40. The diagrams represent total cost curves (TC) of four firms in the short Which firm has only fixed costs? A B Tc Te costs A costs quantity © quantity c D t Tc costs qe costs © quantity © quentiy 1v131P1/Q18] 41, An entrepreneur started a small business making candles. In the first month 1000 candles were made. The costs were $ raw materials | 1000 packaging 800 insurance 100 depreciation | 100 rent 500 TOPIC 4.3 © PAGE 6 ‘What were the average variable costs for the month? A $1.00 B $1.80 c $1.90 D $2.00 IN13/P1/Q21) 42, 'The diagram shows the fixed costs, variable costs and total costs of a firm. costs ° s output Which distance represents the firm's fixed costs? A PS B QR c @s D RS (J14/P1/Q14) 43, When it produces 100 units, a firm’s total variable cost is $300 and its total fixed cost is $2700. ‘What is the average cost? A $3 B $24 c $27 D $30 (141P1/Q15} 44, The diagram shows the cost and revenue curves of a firm which starts, to make a profit only after producing 100 units of output. 1 costs and . revenue / S500 : 9 100 output What are the correct labels for line 1 and line 2? Yi mcaan,, S 38.0 Fg Osts that ag whether or rtp § ‘is operating. gy yh out sa a havetobepais “i MD Pettey inizeduten tage) betneen tl eg tal costs te ga 35. D Prtins imized when thet," between een, total cost isthe ge. Fits, calcul ty, tng 437-28, 45822, then find the gras | ference between zp, enue and stag 6A Varah, are costs that vag output produ Compoient pats doy bicycle vay wih ber of bey pty Options B, C0 examples of fay BA Freda Costs that do with output Tht when output is #7 there ae fied ot) (no variable cost} § highest ATC (it0# alzero ouput R 8.0 Fim as same amaunt a! gardles of the output 30, B Costs dent on the led iskrown asa Thus costs on nda to vary with te output while oss! ing workshop an vehicles do nol" ‘on tha vel of4,3 Produation, Coss, Revenues and Profs TOPIC 4.3 © PAGE 7 Thinking 45. The table shows output and total costs of production of a firm with three workers. output | total costs ($) week] 5 °| 1500 week2] 6 1600 week3 | 7 1700 week | 8 1800 How did output per worker and aver- ‘age cost of the product change over the period? ‘output per worker | average cost A| decrease no change B increase decrease c increase no change D| nochange ’.,| , increase (N14/P1/Q15) 46. In 2013, Barclays Bank had two branches in a city. It decided to close them both, move to a different build- ing and employ fewer hourly-paid staff. What is likely to have happened to the bank’s fixed and variable costs? fixed cost_| variable cost A fall fall B fall rise c rise fall D rise rise (J15/P11Q14) 30 20 10; 100 output What is the firm's total variable cost ‘at an output of 100 units? A $100 B $500 © $10 000 —_D_ $50 000 (J15/P1/Q15] 48. A company supplying water spent $470 million creating a network of pipes to distribute water more effi ciently. It employed local workers and boosted the local economy. It also provided better facilities for the tour- ist industry. What cannot be concluded from the above? A. The company increased its profits. B_ There was a decrease in regional unemployment. C There were fixed costs of $470 million. D_ There were positive externalities. (N15/P1/Q14] 49. The table shows the information that managers of a company have from a week of business activity. number of employees 100 average wage $900 value of output $100000 rent $10000 raw materials $20000 Assuming there are no other costs, what is the value of the fixed costs? P-1-0-c-0-5-§ line 1 es 47. The diagram shows the costs of a “Y* MC@Answers firm ‘A | average cost | average revenue boat Hi ene ($0005) 40, © Unlko VC, FC Bea |e ddoos not vary with the | total revenue | total cost u fovel of output, thus if WG-0, thon TC=FC, D| variable cost price 50 A.B Insurance, de ivratPriQuay 40 ‘ecation and rent do not vary with tha lovel of out put, therefore classified as FO, while ram material and packaging costs are expected to vary with the output, therefore classed as VC. AVC=VCIO, ($1.8 =$1800/ 1000), 42. D Fixed cost is 2 cost which does not change with output in the short un. This means that even if a firm produces Zero output, it still has to pay the fixed cost. This is represented by the vical distance RS. 48. D Average cost =AFC+AVC we output TFC sa output =3427=308 4G To make a Prof, total revenue should ‘exceed total cost. Line 1 should be above line 2. C isthe correct answer. 45. B The firm has hired 3 workers to prod- Luce the output for a fm. Between week 1 and week 4, output increased from 5 to 8 implying output per Worker has als increased, tal cos ‘output which has decreased, 500) 1600200 EN) Par a Bisthe corect answer. ‘Average cost =4.3 Production, Costs, Revenues and Profits A $300 B $10 000 © $20000 =D $30 000 1N15/P11Q16) 50. How does a firm guarantee that it makes the maximum profit? A. by maximising the difference between its total revenue and total cost B_ by maximising the number of goods that it sells C by minimising the number of goods that it keeps in stock D_ by minimising the difference between average revenue and average cost, [416/P1/Q12) 51. A survey of managers in the USA revealed that: most businessmen feel that a company's responsibility is ‘to serva the interests of owners, emp- /loyees, customers and the public’. ‘The idea of profit maximisation, in contrast, implies that a company’s main responsibility should be to the A customers B_ employees © owners —D_ public IN16/P1/Q12] 52, Some agricultural co-operatives have changed from labour-intensive to capital-intensive methods of prod- ution. What might be a cause of this change? A. Average productivity of agricul- tural workers has increased. B_ Farming equipment has become more efficient, C People are eating less food for health reasons, D_ Some agricultural land has been sold for housing. IN16/P1/Q13} TOPIC 4.3 > PAGES 63. A firm has fixed costs of $200 for its daily output. The table shows its daily total variable costs. output (units) | 1] 2] 314 total variable costs ($) |300|400|700| 800] What can be concluded about the firm's average total cost? vamp it falls continuously it is highest at output 4 units it is lowest at output 4 units it rises continuously IN16/P1/Q14) 5" Vi mcarony, 4A The tet, verted to tranches ‘one building, ‘Oza fixed cost is duced the nunty® hourly paid ty! its vate ct ng M1. DG=TH st From the gu, we, cass 101 tery, put rededs TO = 10050 = BA To com proliferation crm revenue and tl 2a, requte, wich’ rie, 8 Retiszs ample ofa fied czy does not cepend ors amount of outpt > 51. C Mthetics objective is prot max zon, it would pus interestotits ones. 2B Femingss, mmenthas become means that proses wilinrease ands) fall Hence @ shit) lebourtoacaptliessy process, 5 C Averages cost total cost output ete Bilt ee