LS3- Costs and Revenues

Question 1

Explicit costs

Answer 1

• Costs that require physical payment
• Fixed and variable

Question 2

Implicit costs

Answer 2

Opportunity costs i.e. profit they could have made from the next best alternative

Question 3

Fixed costs

Answer 3

Rent, salaries, interest on loans, advertising

Question 4

Variable costs

Answer 4

Wages, utility bills, raw material bills

Question 5

AVC costs graph explained

Answer 5

• At the start, each worker could provide more output than they had cost individually
• After a point, each added worker would not add more output than they cost, hence the AVC rose after this point from the trough

Question 6

If we hire some workers

Answer 6

Output is increasing at a faster rate than costs in the shallow parts of the curve due to the law of diminishing returns

Question 7

When the total cost curve becomes steeper

Answer 7

Constraints on fixed FoP reduces labour productivity, hence the curve becomes much steeper

Question 8

MC

Answer 8

Change in TC/change in Q (MP)

Question 9

TR

Answer 9

P x Q

Question 10

AR

Answer 10

= TR/Q = P

Question 11

Revenue curves depend on

Answer 11

The level of competition- perfect or imperfect

Question 12

Perfect competition

Answer 12

• Many buyers and sellers- infinite
• Homogenous goods
• Firms are price takers- take market price only
• No barriers to entry and exit
• Perfect information

Question 13

Imperfect competition

Answer 13

• Few buyers and sellers
• Differentiated goods
• Firms are price makers
• High barriers to entry/exit
• Imperfect information

Question 14

Relationship between elasticity of the curve, price and revenue

Answer 14

• on elastic part of demand curve- if firm lowers prices, then total revenue increases and if it raises price then total revenue falls.
• on inelastic part of demand curve- if firm lowers prices, then total revenue decreases and if it raises prices then total revenue rises.