  #### Question 1

Why can fixed costs be considered as an entry fee?

#### Question 2

Distinguish between the very short-run, the short-run, the long run and the very long run.

#### Question 3

Explain the term marginal cost.

#### Question 4

How would you decide, looking at a firm's average cost curve, if it was capital or labour intensive?

#### Question 5

How and why do cost curves change with time?

#### Question 6

Explain how a firm's short run average total cost curve and marginal cost curve are related.

#### Question 7

Use diagrams to distinguish between the law of diminishing returns and economies of scale.

#### Interactive questions

The following table of data describes the operation of a firm over a limited output range, and is used for the next 5 questions.

Output 0 1 2 3 4 5 6 7 8 9 10
Total cost 100 120 140 160 220 300 450 600 1,000 2,500 5,000

1

##### Fixed costs

The fixed costs for the firm are:

 a) 100 b) 10 c) 5 d) Not able to be calculated from the data Yes, well done. FC is the costs of 'output zero'. It is the entry cost to production in the short-run.No. Look again, but think first.Your answer has been saved. 2

##### Average cost

The average cost of production when 5 items were made is:

 a) 55 b) 60 c) 75 d) 86 Yes. Spot on. Answer. AC = TC/output. In this case, for 5 units, 300/5 = 60.No. Look again, but think first.Your answer has been saved. 3

##### Marginal cost

The marginal cost of the 7th unit is:

 a) 450 b) 600 c) 400 d) 150 Yes. Spot on. It helps to know your definitions. Answer. Marginal cost of 7th = TC of 6th - TC of 7th = 600 - 450 = 150No. Look again, but think first.Your answer has been saved. 4

##### Diminishing returns

The firm exhibits diminishing returns to the variable factor from the:

 a) 2nd unit made b) 3rd unit made c) 4th unit made d) 5th unit made Yes. Spot on. Diminishing returns = rising AVC. AVC is: at output 1=20, 2=20, 3=20, 4=30, 5=40, 6=58, 7=71. Constant returns up until 3 units and then diminishing.No. Look again, but think first.Your answer has been saved. 5

##### Variable cost per unit

The variable cost per unit when 4 units are made is:

 a) 20 b) 30 c) 40 d) 58 Yes. Spot on. VC per unit = TVC / Output. From table AVC is at output 3=20, 4=30, 5=40, 6=58. Now read off the answer. It is 30.No. Look again, but think first.Your answer has been saved. 