CIE 3M Production Costs Practice Questions 1. An investment counselling company has a total revenue of $159 000. Accountants have determined that the costs of the business are $75 000. The owner, who has invested $40 000 in the business, knows that she could be earning 10% on the funds if they were used through a banking investment opportunity. She could be earning at least $90 000 as a stockbroker with the company she work for before opening her business. Calculate the following: a. The accounting profit (if any) for the business. b. The economic costs (opportunity costs) of the business c. The economic profit or loss for the business 2. Which measure of profit - economic profit or accounting profit - do you feel is the most meaningful indicator of the financial status of the business? Explain your answer. 3. For each of the following businesses, suggest one fixed cost and one variable cost: a. Landscaping b. Graphic Design C . Car rental agency d. Clothing wholesaler e . Cell phone manufacturer 4 . A business that is capable of producing a total product of 60 units per day by employing 10 workers finds that it can produce a total of 105 units per day if it employes 11 workers. Calculate the average product in both situations. What is the marginal product? 5. The table below shows the production of hockey sticks by a Canadian business. Using the figures, draw a graph that shows the following: a. Total product curve b. Average product curve C . Marginal product curve d. Indicate using dotted lines and labels: the range of increasing returns, positive diminishing returns, and negative diminishing returns. Labour Total Product Average Marginal (workers) (hockey sticks per day) Product Product 160 1 160 160 240 400 200 2 100 3 500 166.6 40 135 4 540 -40 100 5 5006. Using the short-run costs from the table below, do the following a. Do the calculations to complete the data in the table b. Create a graph showing the fixed cost, variable cost, and total cost curves. d. C. Explain the relationship between total cost and variable cost as output Increases. Show how total cost and variable cost illustrate the law of diminishing returns. . Create another graph showing the average fixed cost, average variable cost, average total cost, and f . marginal cost curves. Explain the relationship of marginal cost to both average variable cost and average total cost. Labour Total (L) Change Fixed Variable Product Total Change Marginal Average Average Average in Total Costs Costs Fixed Variable Total (q) Cost in Total Costs Product (FC) (VC) (FC + Cost (ATC/q) Costs Costs Costs VC) (FC/q) (VC/q) (AFC+AVC) 0 825 80 140 1 80 825 140 120 160 2 200 825 300 125 50 1125 3 250 825 425 20 110 4 270 825 535 10 105 5 280 825 640 7. Examine the of short-run costs for The Leather Works, which manufactures leather coats. a. Complete the table of short-run costs b. Create a graph showing fixed cost, variable cost and total cost. Create another graph showing average fixed cost, average variable cost, average total cost, and C. marginal cost. d. Explain using your graphs, the law of diminishing returns. Average Average Average Fixed Variable Total Marginal Fixed Costs Variable Cost Total Cost Labour Total Product (q) Costs (FC) Costs (VC) Costs (TC) Costs (MC) (AVC (ATC) (L) (AFC) 0 0 20 20 1 3 20 20 40 7 20 60 3 10 20 80 4 12 13 20 100 5