ECO5000 Practice Question - Ex3 without Answers

EXERCISE THREE

1. The average fixed cost of producing two products in a workshop is RM600 while the average variable cost is RM140. For an output of three products, the average fixed cost is RM400, while the average variable cost is RM120. Calculate the marginal cost of increasing production from two to three products.

2. If an airline is flying half-empty planes from London to New York, what is the marginal cost of carrying extra passengers?

3. A carpenter manufacturers chairs. His fixed costs are RM250 per week, and his variable costs are RM50 per chair. He has a contract to make ten chairs per week, sells them for RM100 each, and thus makes RM25 profit per chair. He is offered another contract to make an additional four chairs a week, for a price of RM66 per chair. Should he accept this contract? Explain your answer.

4. The short run total cost curve of a firm is given by the formula:

TC = 1500 + 20Q²

Where Q equals the level of output.

a) What element of the formula represents the firm’s variable costs?

b) How much are the firm’s fixed costs?

5. The Following data applies to a toymaker manufacturing rocking horses:

Units of output (per week) Marginal cost (in RM)

1 80

2 60

3 80

4 120

5 160

6 200

Fixed costs are RM200 per week.

Calculate:

a. the total variable cost at each level of output

b. the total cost at each level of output

c. the average variable cost at each level of output: and

d. the average total cost at each level of output.

6. Mr. Kit Seng runs a small furniture firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and invested $20,000 on materials that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a manager for a competitor..Total annual revenue from furniture sales is $72,000. Calculate accounting profits and economic profits for Kean’s furniture firm.

7. Given the following information:

Price of Good X                   Quantity demanded (units)

(RM per unit) Good X Good Y Good Z

1 100 1000   10

2 50    500   20

3 25    250   40

4 20   200   80

5       18     180       180

i) Suppose the price of good X increases from RM3 per unit to RM4 per unit,      calculate

a. Price elasticity of demand for good X

b. Cross elasticity of demand for good Y with respect to good X

c. Cross elasticity of demand for good Z with respect to good X

ii) What is the relationship between 

a. Goods X and Y

b. Goods X and Z

iii) If you are the producer of good X and you want to increase your total revenue,      would you increase the price from RM3 per unit to RM4 per unit? Why?

8. A producer of rubber goods manufacturers its own rubber sheet, which is subsequently used in the manufacture of a wide range of products, at a cost of RM 6 per square meter. The cost is allocated as follows:

Raw materials: RM2

Labour: RM2

Depreciation of buildings and machinery: RM2

The current market price for rubber sheet is RM5.50 per square meter.

     Should the firm continue to manufacture its own rubber sheet or should it buy

        from an outside  supplier?

9. Suppose market demand is represented by 

Q d = 3,000,000 – 700P + 200C

And market supply is represented by

Q s = 1,000,000 + 400P                                    (P = price; C = cost of production)

a) How do you determine market price? 

b) Suppose C = 15, 000. What is the market price? What is the quantity supplied

         and quantity demanded. 

10.  An ice-cream vendor has a short run total cost function of TC = 4Q² + 100

His total revenue function is TR = 2Q² + 160Q

i. What is the vendor’s marginal cost? 

ii. What is his marginal revenue? 

iii. How many ice-creams must the vendor sell in order to maximise his profit? 

iv. What will be his total profit? 

11.  The Rolls Royce Corporation, a maker of aircraft engines, determines that the demand for its product is:

P = 2000 – 50Q 

Where P is the price in dollars of an engine and Q is the number of engines sold per month.

a) To sell twenty engines per month, what price would Rolls Royce have to charge?

b) If it sets its price of $500 (which is very cheap for a jet engine!), how many engines will Rolls Royce sell per month? 

c) What price will maximize revenue?