Fixed And Variable Costs

Question 1

What is meant by the short run for a business

Answer 1

A period of time where there is at least one fixed FoP for a business

Question 2

What is meant by long run for a business

Answer 2

A period of time where all FoP are variable

Question 3

What are the two fixed FoP in the short run

Answer 3

LAND CAPITAL

Question 4

What two different groups of costs are there

Answer 4

1) Explicit costs - costs which require actual payment 2) Implicit costs (Opportunity costs) - the profit they could of made doing their next best alternative

Question 5

Examples of fixed and variable costs

Answer 5

FC: RENT, SALARIES, INTEREST ON LOANS, ADVERTISING, BUSINESS RATES VC: WAGES, UTILITY BILLS, RAW MATERIAL COSTS, TRANSPORT COSTS

Question 6

What is the shape of a TFC?

Answer 6

Question 7

What is the shape of an average fixed cost curve

Answer 7

Question 8

What is the shape of an AVC curve?

Answer 8

Question 9

Take this example, DRAW THE AVC curve and explain why its shaped the way it is

Answer 9

AVC curve is shaped like a smiley face. AVC will fall until at a certain point of the law of diminishing returns kicks in, which will cause AVC to rise again.

When the fourth worker is hired, diminishing returns kick in, labour productivity is falling as is marginal product and therefore causes average variable cost to rise.

Question 10

Equation for AVC

Answer 10

AC- AFC

OR

TVC/Q

Question 11

TFC equation

Answer 11

TFC = TC - TVC or AFC X quantity

Question 12

AFC equation

Answer 12

TFC / Quantity

or

AC - AFC