Theory of the Firm

1. Explain the difference between each of the following: (write answer on sheets)

a. fixed costs and variable cost

b. the short run and the long run

c. marginal cost and marginal revenue

2. Using the table below, calculate the value of the marginal cost of the 3rd unit of output.

3. In the long run, if a very small factory were to expand its scale of operations, it is likely that it would
initially experience

(a) an increase in average total costs

(b) diseconomies of scale

(c) economies of scale

 (d) constant returns to scale

5. A firm's average total cost is £30 at 5 units of output and £32 at 6 units of output. The marginal cost of
producing the 6th unit is:

(a) $2

(b) $12

(c) $32

(d) $42

6. A firm has a variable cost of £100 at 5 units of output. If fixed costs are £40, what will be the average
total cost at 5 units of output?

(a) $28

(b) $60

(c) $12

(d) $140

7. Which of the following would generally be regarded as fixed costs in the short-run?

(a) Interest charged on a bank loan for new equipment

(b) Security costs for the factory site

(c) Weekly wages for shop-floor workers

(d) The cost of raw materials

(e) Payments for rent

8. Fill in the blanks in the definitions below to give a good explanation of each of the different types of cost.
Some suitable words or expressions for the blanks are also given below.

output - vary - Average - output - not vary - total cost - output -

marginal

Fixed costs can be defined as costs that do with the level of .

Variable costs are costs that do with the level of .

cost is the cost per unit of output produced. The cost is the
change in total cost when one more unit of output is produced. To work out average cost you would

need to divide the level of by the level of .

9. Which of the costs below would you expect to be long-run (as opposed to short-run) costs?

(a) Wage payments

(b) Depreciation on buildings

(c) Interest payments on debentures

(d) Rent on the business site