Question

1. The output and cost of production of rice (in bags) are presented in the table below. Use the information in the table to answer the questions that follow.

Output of rice (bags):        0    1    2    3    4
Total Variable Cost (TVC) $:  0    5    7    10   20
Total Cost (TC) $:            7    12   14   17   27

(a) Calculate (i) Average Fixed Cost (AFC) at output levels 0, 2 and 4 (ii) Marginal Cost (MC) at all levels of output.
(b) If the price of a bag of rice were $10: (i) Calculate the profit/loss at all levels of output. (ii) At what output level(s) is the maximum profit made?
(c) Draw the marginal cost curve (the use of a graph sheet is essential).

Accepted Answer

(a)(i) AFC = FC ÷ Q, where FC = TC − TVC = $7 at every level.
At output level 0: AFC = 7/0 = ∞ (infinity)
At output level 2: AFC = 7/2 = $3.50
At output level 4: AFC = 7/4 = $1.75

(ii) Marginal Cost (MC) = ΔTC ÷ ΔQ (change calculated from output level 1):
MC at level 1 = (12−07)/(1−0) = $5
MC at level 2 = (14−12)/(2−1) = $2
MC at level 3 = (17−14)/(3−2) = $3
MC at level 4 = (27−17)/(4−3) = $10

(b)(i) Profit = TR − TC, where TR = price × quantity (price = $10):
Level 0: (10×0)−7 = −$7 (loss)
Level 1: (10×1)−12 = −$2 (loss)
Level 2: (10×2)−14 = $6 (profit)
Level 3: (10×3)−17 = $13 (profit)
Level 4: (10×4)−27 = $13 (profit)

(ii) Maximum profit ($13) is made when 3 or 4 bags of rice are produced.

(c) The marginal cost curve is plotted with output level on the x-axis and MC ($) on the y-axis using the MC values calculated above (5, 2, 3, 10 at output levels 1–4); it takes the typical U-shape, falling then rising as output increases.

WAEC Economics 2013 Theory — Question 1

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