09 Costs & Revenues

Question 1

Define the Short-Run.

Answer 1

When at least one factor of production is fixed, while others are variable.

Question 2

Define the Long-Run.

Answer 2

When all factors of production and costs are variable.

Question 3

Which factor inputs are fixed or variable?

Answer 3

Capital - fixed
Land - fixed
Raw materials - variable
Labour - variable

Question 4

What is a variable factor input?

Answer 4

A factor that varies, due to a change in output.

Question 5

What is a fixed factor input?

Answer 5

A factor that remains fixed, regardless of a change in output.

Question 6

What are all factor inputs in the long run?

Answer 6

Variable.

Question 7

How could a producer increase capacity?

Answer 7

• By moving into a larger factory
• Buying new machinery
• Increasing labour
• Using more raw materials

Question 8

How are total costs or revenue calculated?

Answer 8

Fixed (costs or revenue) + variable (costs or revenue)

Question 9

How are average costs or revenue calculated?

Answer 9

Total costs (or revenue)/output

Question 10

How are marginal costs or revenue calculated?

Answer 10

Change in total costs (or total revenue)/change in output

Question 11

Define the Law of Diminishing Return (LoDR)

Answer 11

As more of a variable FoP (e.g. Labour) is added to a fixed FoP (e.g. capital), the marginal product of labour will initially rise but eventually fall, thus raising marginal costs.

Question 12

MC < AC =

Answer 12

AC Decrease.

Question 13

MC > AC =

Answer 13

AC Increase.

Question 14

MC = AC =

Answer 14

No change.

Question 15

What is the equation for Marginal Product?

Answer 15

Change total product/change in labour

Question 16

What is the equation for Average Product?

Answer 16

Total product/Labour

Question 17

Define fixed cost.

Answer 17

Costs that do not change with output, but can change year to year.

Question 18

Define variable cost.

Answer 18

Costs that change depending on output.

Question 19

Give examples of fixed costs.

Answer 19

• Machinery
• Rents on business premises
• Buildings insurance
• Quarterly heating and lighting bills
• Salaries of senior staff
• Annual marketing and advertising budget

Question 20

Give examples of variable costs.

Answer 20

• Wages
• Working capital
• Commission
• Raw materials
• Packaging and postage
• Piece-rate
• Fuel for delivery vehicles
• Distribution costs

Question 21

What is the equation for AFC?

Answer 21

TFC/output

Question 22

What is the equation for TVC?

Answer 22

VC per unit x output

Question 23

What is the equation for AVC?

Answer 23

TVC/output

Question 24

Define revenue.

Answer 24

The inflow of money into a firm.

Question 25

What is the equation for TR?

Answer 25

Price x Quantity

Question 26

Define sales.

Answer 26

Transaction between a buyer and seller, in which the seller gains revenue.

Question 27

What should firms do to increase sales?

Answer 27

Decrease prices.

Question 28

What is the equation for Marginal Revenue?

Answer 28

Change in TR/Change in total output

Question 29

Where is TR maximised?

Answer 29

Where PED is -1 (unitary).

Question 30

What is the equation for Average Revenue?

Answer 30

TR/output

Question 31

What is the equation for Marginal Revenue?

Answer 31

Change in TR/Change in output

Question 32

What happens to TR if demand is responsive, and price is decreased?

Answer 32

Firms will experience a rise in TR if price is decreased because sales have increased significantly.

Question 33

What happens to TR if demand is unresponsive, and price is decreased?

Answer 33

Firms will experience a fall in TR if price is decreased, because sales have dropped due to inelastic demand.

Question 34

What is Average Revenue curve, on a diagram, and what does it show?

Answer 34

It is the price and shows that demand curve.

Question 35

When on a MR diagram is revenue maximised?

Answer 35

When MR intersects with 0.

Question 36

When does MC rise?

Answer 36

When the Law of Diminishing Return comes into effect.

Question 37

Define increasing returns to scale.

Answer 37

Where a charge in inputs leads to a more than proportional change in output.

Question 38

Define decreasing returns to scale.

Answer 38

Where a change in inputs leads to a less than proportional change in output.

Question 39

Define constant returns to scale.

Answer 39

Where a change in inputs leads to a unitary change in output.

Question 40

Define the minimum efficient scale.

Answer 40

Where productive efficiency is achieved at the lowest possible output.

Question 41

Increasing RTS is also known as...

Answer 41

Economies of Scale.

Question 42

Decreasing RTS is also known as...

Answer 42

Diseconomies of Scale.