Question

1. The total fixed cost (TFC) and total cost (TC) functions of a hypothetical firm are shown in the graph above (Section A, Q1). (a) Determine the firm's: (i) variable cost at output levels 2, 4 and 6; (ii) average total cost at output levels 2 and 3; (iii) marginal cost at output levels 4 and 6. (b) If the price of the firm's product is $40, calculate the firm's profit or loss when the following units are sold: (i) 2 units; (ii) 4 units.

Accepted Answer

(a)(i) Variable cost = Total cost − Fixed cost. From the graph: at output 0, FC=$40. At output 2, TC=$100, so VC=100−40=$60. At output 4, TC=$140, so VC=140−40=$100. At output 6, TC=$180, so VC=180−40=$140.
(ii) Average total cost (ATC) = TC/Output. At output 2: ATC=100/2=$50. At output 3: TC=$120, ATC=120/3=$40.
(iii) Marginal cost = change in TC/change in output. Between output 3 and 4: MC=(140−120)/(4−3)=$20. Between output 5 and 6: TC at 5=$160, MC=(180−160)/(6−5)=$20.
(b)(i) At 2 units: TR=$40×2=$80; TC=$100; Loss = TC−TR = 100−80 = $20 loss.
(ii) At 4 units: TR=$40×4=$160; TC=$140; Profit = TR−TC = 160−140 = $20 profit.

WAEC Economics 2015 Theory — Question 1

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