Business costs, revenues and profit

Question 1

What are ‘costs’?

Answer 1

Costs are expenses that must be met when setting up and running a business

Question 2

What are ‘fixed costs’?

Answer 2

Fixed costs are costs that do not vary with the level of output

Question 3

What are ‘variable costs’?

Answer 3

Variable costs are costs that change when output levels change

Question 4

What are ‘total costs’?

Answer 4

Total costs = fixed costs + variable costs

Question 5

Give examples of fixed costs.

Answer 5

rent, business rates, and insurance premiums.

Question 6

Give examples of variable costs

Answer 6

raw materials, packaging, fuel, and labor.

Question 7

How are total variable costs calculated?

Answer 7

TVC = VC x Q.

Question 8

Define total revenue

Answer 8

Total revenue is the total income a firm receives from selling its output

Question 9

What is the formula for calculating profit?

Answer 9

Profit = Total Revenue - Total Costs.

Question 10

Describe the behavior of the average cost curve

Answer 10

The average cost curve is U-shaped, initially declining as output increases due to spreading fixed costs, reaching a minimum, and then rising as diminishing returns set in.

Question 11

How do variable costs change with output levels?

Answer 11

Variable costs increase with higher output levels and decrease when output levels are reduced.