Question

Questions 1- 10 refer to the short-run total and variable cost curves shown in Figure 1 Figure 1 1. In Figure 1, at output 0B, line segment HK equals A. average fixed cost. B. fixed cost. C. average total cost. D. marginal cost. E. total cost. NC 2. According to Figure 1, the marginal cost curve cuts the average total cost curve at output 3. Average total cost is minimized in Figure 1when output equals 4. Marginal cost is minimized in Figure 1 when output equals 5. Referring to Figure 1, average variable cost and marginal cost are equal at output 6. 4 Average variable cost is minimized in Figure 1when output equals 7. Which of the following outputs in Figure 1 have the same average total cost? A. OA and 0B B. 0A and OF C. OC and OL D. OD and OE E. OB and OE 8. Refer to Figure 1. Diminishing returns initially sets in at output A. OA. B. 0B C. OC. D. OD E. OE. F. OF 9. Referring to Figure 1, marginal cost is greater than average total cost A. for all output greater than output 0D D. for all output less than 0C. B. for all output less than output 0D C. for all output greater than output OE. E. for all output greater than 0C. 10. Which of the following statements about Figure 1 is false? A. To the left of output 0B, both TC and VC increase at a decreasing rate B. At output 0D, both ATC and MC equal the slope of line OL C. At output OE, marginal cost equals the slope of line 0M. D. Between outputs 0C and 0D, MC lies above the AVC curve but below the ATC curve E. Both the AVC at output 0A and the AVC at output OF equal the slope of line 0J

Answer 1

1. The correct option is

• B. Fixed Cost.

The difference between total cost and total variable cost is fixed cost. It is constant throughout the production levels.

2. The correct option is

• D. OD.

The marginal cost is the slope of the total cost, while the average total cost is the cost per unit output. At point OB, the cost is BK, and the average cost will be BK/OB, which is the slope of OK. Similar is the case at output OE. The average cost will be the slope of the line joining origin to the total cost curve. Only at output OD, the slope of OL (average cost at output OD) is equal to the slope of total cost curve (marginal cost at OD).

3. The correct option is

• D. OD.

The average total cost is minimum where the marginal cost is equal to it.

4. The correct option is

• B. OB.

As can be seen, there is an inflection point at K. At an inflection point, the slope changes its direction from increasing to decreasing or decreasing to increasing. The marginal cost is basically the slope of TC. Before point K, the MC is decreasing (suggested from the curvature of TC), and after K, the MC is increasing. Thus, MC is minimum at point K, corresponding to the output level OB.

5. The correct option is

• C. OC.

Argument is similar to part - 2. At point I, where the line joining origin and point on TVC curve is equal to (or becomes the) slope of variable cost curve. The output corresponding to I is OC.

6. The correct option is

• C. OC.

The average variable cost is minimum at the output where it is equal to the marginal cost.

7. The correct option is

• E. OB and OE.

As discussed, the average cost would be the slope of the line joining origin to the TC. The slope of line OM is the average cost of OE, while the slope of line OK is the average cost of OB. As can be seen, line OK is a part of OM, and both have same slopes. Hence, OB and OE have the same average total cost.

8. The correct option is

• B. OB.

The diminishing returns causes increase in the marginal cost. As found, marginal cost is minimum at OB, and starts to increase after OB.

9. The correct option is

• A. for all output greater than output OD.

Before OD, the marginal cost is below the average cost, and at OD, marginal cost is equal to the average cost. After OD, marginal cost is above the average cost.

10. The correct option is

• C. At output OE, marginal cost equals the slope of line OM.

All other statements are correct. At output OE, the the marginal cost is the slope of the total cost curve. The slope of line OM is the average cost.