Lecture No. 3; Managing Business Costs

Q21 The statements below refer to explicit costs, all of them are TRUE except which one?

Explicit costs relate directly to the costs of production, but would not include business rates and insurances etc.

Q22 In the context of variable costs of production which of the following statements is false?

Variable costs decline continuously as output is increased.

Q23 For a manufacturer, which of the following would NOT be treated as a variable costs?

Depreciation of machines owing to their age.

Q24 In the context of a firm’s fixed costs of production, which of the following statements is true?

Are independent of the level of output in the short term.

Q25 For a firm experiencing diminishing marginal returns which of the following statements is true?

Despite falling average fixed costs (AFC), average total costs (AC) will start to rise at higher levels of output.

Q

Figure No. 2

26 Figure No.2 is a plot of the costs of production for a particular firm over a range of output from zero to 1000 units per week. Between which outputs are diminishing marginal returns setting in?

200 & 300 units

Q27 In figure No. 2 the ‘gap’ between AC (Average Total Costs) and AVC (Average Variable Costs) represents which of the following?

Average Fixed Costs (AC=AVC+AFC)

Q28 In figure No.2, from an output of 300 units per week Marginal Costs (MC) are rising as output is increased, given the formula for marginal costs we can conclude which of the following?

Total Costs are increasing at an increasing rate.

Q 29 Figure No.3 shows the weekly total costs curves for a given firm, over a range of output, which of the following statements are correct?

1. Marginal costs are constant 2. Marginal costs are equal to £20 3. The firm is experiencing diminishing marginal returns

4. The firm has a low operational gearing

1 and 2 are correct

Figure No.3

Q30 At an output of 1000 units per week a firm's Total Variable Costs (TVC) are £5,000 and its Average Fixed Costs (AVC) are £2 (not including normal profit). The firm's target normal profit is £500 per week. Therefore, if normal profits are include in total costs its Total Costs (TC) per week are?

£5,000 + £,2000 + £500 = £7,500

Lecture No. 4 The Firm’s Revenue: Demand & Price Elasticity of Demand

Q31 Figure No.4 shows the demand curve for a firm’s brand of tennis shoes. Currently the firm’s selling price is £50 a pair and annual sales are 24,000 pairs. A 20% reduction in the price of tennis shoes sees the quantity demanded to expand by 30%. What will the new selling price and quantity demanded given this fall in price?

?

Price = £40, Quantity (Qd) = 31,200 annually (пропарция)

Figure No.4

Q32 Figure No.4 shows the demand curve for a firm’s brand of tennis shoes. Currently the firm’s selling price is £50 for a pair of tennis shoes and annual sales are 24,000 pairs. A 20% reduction in the price of tennis shoes sees the quantity demanded to expand by 30%. As a result the firm’s total revenue from this particular brand of tennis shoes will change by what percentage?

4.00% (24000*50=1200000 (100%),31200*40=1248000 (104%))

Q33 When the price of a good rises, the quantity demanded falls, this inverse relationship between price and the quantity demanded is explained by the income and substitution effects of a price rise. The Decide whether the following statements about the income and substitution effects of a price raise are correct.

1. The income effect refers to the effect on price and quantity demanded of a change in consumer income.

2. The substitution effect refers to the effect on the quantity demanded of a change in the price of a substitute good. 3. The often heard comment: ‘Well I can’t afford that, I’ll buy another brand instead!” is in fact referring to the income and substitution effect of a price rise.

Only No.1 and No.2 are correct

Q34 The formula for price elasticity of demand (PED) is

The percentage change in quantity demanded ÷ the percentage change in price

Q35 The price elasticity of demand for a given product is -1.23; a change in the price of this product from £250 to £262.50 should see the quantity demanded change by how much?

Fall by 6.15%

Q36 With respect to price elasticity of demand which of the following statements is correct

1. The sign of price elasticity of demand indicates the nature of the relationship between price and the quantity demanded; therefore in normal circumstances this should be negative.

2. The absolute value (ignoring the sign) indicates the magnitude of the relationship between price and quantity demanded.

3. An absolute value greater than one indicates that demand is responsive to changes in price.

4. An absolute value less than one indicates that demand is inelastic with respect to price.

5. For goods whose demand is elastic with respect to price any rise in price will see a fall in total revenue.

6. For goods whose price elasticity of demand is –0.75, a rise in price will see total revenues rise (and visa-versa)

All statements are correct

Q37 The Figure No. 5 shows the demand curves for two different products (Good A and Good B). In both cases the price has fallen; Good A from £1.10 to £1.00, Good B, from £110 to £100. Given the change in the quantity demanded (Qd) what is the price elasticity of demand for each product?