Managerial Economics
IIM BANGALORE
PROBLEM SET 2
TOPIC: Costs and Perfect Competition
1. Economies and diseconomies of scale explain why the:
a. Short run average fixed cost curve declines so long as output increases
b. Marginal cost curve intersects the minimum point of firm’s average total cost curve
c. Long run average total cost curve is typically U-shaped
d. Short run average variable cost curve is U-shaped
2. Jack spends $200 a month to rent a building for his company, $600 a month for the capital
he employs to produce widgets, and $10 per hour for every unit of labour he employs. Jack
distinguishes between his fixed cost and his variable cost by
a. deciding whether or not he is producing in the short run or the long run.
b. whether or not the cost varies as his level of production changes.
c. whether or not the cost exceeds $500.
d. recognizing that capital is always a fixed cost while rent and labour are variable costs.
3. Randy Ranch’s daily total cost of accommodating overnight guests is given by TC = 100
+ 5Q. On the basis of this information, the average fixed cost, when there are 25 overnight
guests, is:
a. $4.
b. $5.
c. $6.
d. $7.
e. $9.
4. With fixed cost of Rs. 400, a firm has an average total cost of Rs. 3 and an average
variable cost of Rs. 2.50. Its output is .
a. 200 units
b. 400 units
c. 800 units
d. 1600 units
e. 1000 units
5. Which two of the following statements are correct?
[Link] the short - run, Δ TFC = 0, therefore Δ TC = Δ TVC
B. If decrease in AFC < increase in AVC, then AC decreases
[Link] decrease in AFC = increase in AVC, AC remains constant
D. If decrease in AFC > increase in AVC, then AC increases
Choose the correct answer from the options given below
a. A and C
b. B and C
c. B and D
d. A and D
6. Which is not a fixed cost over a week’s time?
a. monthly rent of $1,000 contractually specified in a one-year lease
b. an insurance premium of $50 per year, paid last month
c. an attorney's retainer of $50,000 per year
d. a worker's wage of $15 per hour
7. If the short-run average variable costs of production for a firm are rising, then this
indicates that:
a. average total cost is at a maximum.
b. average fixed cost is constant.
c. marginal cost is above average variable cost.
8. A competitive firm's short-run supply curve is its ___ cost curve above its ___ cost curve.
a. average-total; marginal
b. average-variable; marginal
c. marginal; average-total
d. marginal; average-variable
9. In a competitive market the equilibrium price is determined:
a. at the intersection of the individual firm’s demand and the market supply curves.
b. at the intersection of the market demand and market supply curves.
c. at the intersection of the individual firm’s demand and marginal cost curves.
d. so as to cover the costs of the potential firms.
e. so as to cover the costs of the firms currently in the industry.
NUMERICALS
1. The short-run cost function of a company is given by the equation TC = 200 + 55q,
where TC (measured in thousand dollars) is the total cost and q is the total quantity of
output (measured in thousand units).
a) What is the company’s fixed cost?
b) If the company produced 100,000 units of goods, what would be its average
variable cost?
c) What would be its marginal cost of production?
d) What would be its average fixed cost?
2. Complete the following table:
Averag
Fixed Variable Tota Margina Average
Labour Quantity e
Cost Cost l l Cost Total
Variabl
Cost Cost
e Cost
1 16 160 80
2 40 160 160
3 60 160 240
4 72 160 480
5 80 160 560
6 84 160 640
3. A firm has a fixed production costs of $5,000 and a constant marginal cost of production
of equal to $500 per unit produced.
a. What is the firm’s total cost function? Average cost?
b. If the firm wanted to minimize the average total cost, would it choose to be very large or
very small? Explain.