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The cost of producing any level of output will depend on the amount of inputs used. The
relationship between output and inputs is shown in a production
function.
In the following production function for good A, a good is produced by using two factors,
labour
( L ) and capital ( K ). How much will be produced if 4units of labour and 3 units of capital
are used? (where TPP is total physical product: i.e. total output).
TPP = 5 L + 5 K = 35 units of output.
Extra output involves using extra input. But increasing the amount of certain inputs may
take time: it takes time, for example, to build a new factory or to install new machines. We
thus make a distinction between short-run production and long-run production.
the period of time in which at least one factor of production is fixed in supply.
Take the case of a typical high street bar (with no garden). Which of the following are likely to
be the fixed factors of production over a period of one month?
(i) Bar staff.
(ii) The number of tables used by customers.
(iii) The bar servery area.
(iv) The floor area given over to customers.
(v) The number of beer and lager taps.
(vi) Opening hours.
(iii) and (iv) only
In the short run, production will be subject to the law of diminishing (marginal)
returns.
The law of diminishing marginal returns states that when one or more factors are
held constant, then, as the variable factor is increased, there will come a point when
additional units of the variable factor will produce
less extra
output than previous units.
We can use total physical product data to derive average and marginal physical product data.
We define marginal physical product ( MPP ) as the amount of extra output gained from the
use of one more unit of the variable factor.
If L is the quantity of labour, which of the following is the formula for the marginal physical
product ( MPP ) of labour?
TPP / L
We can use total physical product data to derive average and marginal physical product data.
We define marginal physical product ( MPP ) as the amount of extra output gained from the
use of one more unit of the variable factor.
If L is the quantity of labour, then which of the following is the formula for the average physical
product ( APP ) of labour?
->TPP / L
he statements below refer to the relationship between APP and MPP. Which is not correct?
->When APP < MPP , the firm must be experiencing increasing marginal returns to labour
If the total product of two workers is 80 and the total product of 3 workers is 90, then:
the average product of the third worker is 30 and the marginal product of the third worker is
A firm produces good X with just two factors of production: capital, which is fixed in supply,
and labour which is variable. The table shows the Total Physical Product of labour ( TPP ) for
various numbers of workers.
Fill in the figures for APP.
Number of workers 0 1 2 3 4 5 6
TPP 0 4 12 18 20 20 18
APP
Now add the figures for MPP. (Note that the figures for MPP are entered
between the columns.)
Number of workers 0 1 2 3 4 5 6
TPP 0 4 12 18 20 20 18
APP - 4 6 6 5 4 3
25 + 8Qe − 3 Q e
2
This question examines how a firm's costs are related to its output. When measuring cost we
should be careful to use the concept of opportunity cost. In the case of factors not already
owned by the firm, the opportunity cost is simply the explicit cost of purchasing or hiring
them. In the case of factors that are already owned by thefirm, we have to impute an
opportunity cost when they are used.
Assume that a firm already owns a machine that has a total life of 10 years. The cost of using
the machine for one year to produce good X is :
The maximum the machine could have earned for the firm in some alternative use during the
year in question
The opportunity cost of using a factor owned by the firm that has no other use and
whose second-hand or scrap value is not affected by its use is zero. Is this statement true
or false?
True
In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of
these factors is thus fixed with respect to the firm's output.
For a bread factory over the course of a month, is the cost of flour a fixed cost or a
variable cost?
Variable
For a chocolate factory over the course of a month, are business rates (local taxes) regarded
as a fixed cost or a variable cost?
Fixed
In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of
these factors is thus fixed with respect to the firm's output.
For a chocolate factory over the course of a month, is an advertising campaign for a new
choclate bar a fixed cost or a variable cost?
Fixed
In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of
these factors is thus fixed with respect to the firm's output.
For a furniture factory over the course of a month, is the cost of electricity for running the
machinery in the factory a fixed cost or a variable cost?
Variable
In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of
these factors is thus fixed with respect to the firm's output.
For a tyre factory over the course of a month, is the cost of overtime pay a fixed cost or a
variable cost?
Variable
In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of
these factors is thus fixed with respect to the firm's output.
For a bread factory over the course of a month, would the basic minimum wage agreed with
the union be a fixed cost or a variable cost?
Variable
In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of
these factors is thus fixed with respect to the firm's output.
For a furniture factory over the course of a month, is the wear and tear on machinery used in
the factory a fixed cost or a variable cost?
Variable
In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of
these factors is thus fixed with respect to the firm's
output. For a furniture factory over the course of a month, is the depreciation of machines due
simply to their age a fixed cost or a variable cost?
Fixed
In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of
these factors is thus fixed with respect to the firm's
Which of the following measures of cost is defined as ( AFC + AVC ) × Q?
Total cost ( TC )
We use a number of different measures of cost: fixed and variable ; and average and marginal.
Which of the following measures of cost can be defined as Σ MC?
( Note: Σ means 'the sum of'.)
Total variable cost ( TVC )
We use a number of different measures of cost: fixed and variable ; and average and
marginal.
Which of the following measures of cost can be defined as Σ MC + TFC?
( Note: Σ means 'the sum of'.)
Total cost ( TC )
This exercise concerns the short-run costs faced by an imaginary firm. All costs are in $
$thousands.
In producing 1 unit of output, the firm faces total variable costs (TVC) of $ 100 and average
fixed cost (AFC) of $ 30.
Calculate:
Total fixed cost (TFC) $ 30
Total cost (TC) $ 130
If the marginal cost (MC) of producing a second unit of output is $ 25 , calculate:
Total variable cost (TVC) $ 125
Average fixed cost (AFC) $ 15
Total cost (TC) $ 155
If the total cost (TC) of producing 3 units of output is $ 195 , calculate:
Marginal cost (MC) $ 40
This exercise concerns the short-run costs faced by an imaginary firm. All costs are in
€thousands.
In producing 1 unit of output, the firm faces total variable costs (TVC) of €17 and average
fixed cost (AFC) of € 15
Calculate:
Total fixed cost (TFC) € 15
Total cost (TC) € 32
If the marginal cost (MC) of producing a second unit of output is €14,calculate:
Total variable cost (TVC) € 31
Average fixed cost (AFC) € 7.
Total cost (TC) € 46
If the total cost (TC) of producing 3 units of output is $57, calculate:
Marginal cost (MC) $ 11
If the marginal cost is below the average cost, then :
the average cost must be falling.
Diminishing marginal returns implies:
increasing marginal costs.
A firm's output is 100 units, its marginal cost is £50, its average variable cost is also £50, and
its average fixed cost is £25. The slope of its average variable cost is:
zero
The diagram shows firm X's short-run cost curves; the firm is producing at output O Q.
What does the area Obc Q represent?
Total costs ( TC ).
The diagram shows firm X's short-run cost curves; the firm is producing at output O Q.
What does the area Oad Q represent?
Total variable costs ( TVC )
The diagram shows firm X's short-run cost curves; the firm is producing at output O Q.
What does the area abcd represent?
Total fixed costs ( TFC ).
Suppose that the following equations describe the total costs facing a firm:
TFC = a
TVC = bQ − cQ
2
3
Which of the following is the equation for AFC?
