BR8B: Bridge: Cost Analysis
Question 1
Suppose you are the owner of a small t-shirt printing business. While conducting a cost analysis of your business, you find that at current production levels, your average total cost (ATC) is \$10. You also know that if you increase production by one more unit, the marginal cost of that unit will be \$5. If you produce another t-shirt:
A. the marginal cost of production will increase.
B. the marginal cost of production will decrease.
C. the average total cost of production will increase.
D. the average total cost of production will decrease.
Hint
Consider what effect your next score on a class quiz, you can think of this as the marginal change in your grade, will have on your average score. What happens to the average if the marginal is greater than the average? What about if the marginal is less than the average?Apply the same logic to costs instead of grades.
Answer
D. the average total cost of production will decrease. If the cost of the next unit of output—the marginal cost—is below the average total cost, then the next unit of output will pull the average cost down. Hence, with the production of an additional t-shirt, the average total cost will decrease. This is reflected in an average total cost curve that is downward-sloping at this point.Question 2
Which of the following expenses would be a fixed cost for a party cruise ship?
A. The food that is served on the cruise.
B. Dishwashing detergent to wash plates and glasses.
C. Cocktails that are served in the ship’s bars.
D. The port docking fee.
Hint
Costs of production are either fixed or variable. Fixed costs do not depend on the level of production, whereas variable costs are a function of the quantity produced.Answer
D. The port docking fee. The cruise ship pays the port docking fee, regardless of the number of passengers it carries.Question 3
If the marginal cost of production is greater than the average cost, in what direction must the average cost be changing, if any?
A. The average cost must be rising.
B. The average cost would become non-existent.
C. The average cost is unaffected.
D. The average cost must be falling.
Hint
If your latest quiz score in a class is above your average score, what happens to your average score?Answer
A. The average cost must be rising. If the cost of the next unit of output—the marginal cost of production—is greater than the average cost, then the next unit of output will raise the average cost. Hence, with the production of an additional unit of output, the average cost will rise. This is reflected in an average total cost curve that is upward-sloping at this point.Question 4
If the average variable cost of producing 5 costumes in Kira’s Costume Shop is $50 per costume, and the fixed cost of the shop is \$100, what is the total cost for 5 costumes?
A. \$50
B. \$250
C. \$350
D. \$150
Hint
The total cost is the combination of all types of cost.Answer
C. \$350 \$350 is the correct total cost. The total fixed cost of the shop is \$100 and total variable cost is $\$50\times5=\$250$ Add total fixed cost to total variable cost together to calculate total cost, $\$100+\$250=\$350$.Question 5
If the fixed cost of Alex’s engraving business is \$100, and the variable cost of each engraving job is \$20, what is the marginal cost of the second engraving job?
A. \$10
B. \$120
C. \$60
D. \$20