1. Complete the following table of costs for a firm. (Note: enter the figures in the MC column between outputs of 0 and 1, 1 and 2, 2 and 3, etc.)

Output	TC ()	AC ()	MC ()
0	55	-
1	85
2	110
3	130
4		40
5		42
6	280
7			90
8			110
9	610
10			150

1. How much is total fixed cost at:
   1. an output of 0?
2. an output of 6?
3. How much is average fixed cost at:
   1. an output of 5?
4. an output of 10?
5. How much is total variable cost at an output of 5?
6. How much is average variable cost at an output of 10?
7. Answer the following:
   1. Referring to the data from question 1, draw the firm's average and marginal cost curves on the following diagram. (Remember to plot MC mid-way between the quantity figures.)
   2. Mark on the diagram the output at which diminishing returns set in.
   3. Assume that the firm is a price taker and faces a market price of 60 per unit. Draw the firm's AR and MR curves on the above diagram.
   4. How much will it produce in order to maximise profit?
8. Shade in the amount of profit it makes.
9. Calculate how much profit this is.

Discussion Questions (Use diagram where you feel it is appropriate):

3 Fixed and variable costs can be variable proportions of the total cost depending upon the product under analysis. If fixed costs are a large proportion of total costs what does this mean for the firm's strategy? Is your answer in accord with real world examples?

4 If you were more productively efficient than a rival how would use the knowledge gained in this exercise to support a strategic price war? Is this insight in accord with real world examples?

5 If you were productively inefficient and subject to a price war, what would be your best response?

6 The theory of costs was developed at a time when mass manufacturing (and not services) dominated modern economies. Does the theory have any relevance for the technological age, where product markets are R&D intensive as well as transitory?

7 If a firm was able to vary its fixed input, how would its average total cost curve change? Can we understand why firms grow and shrink from a cost perspective?