Mr. Maurer
AP Economics
Name: ________________________
Review for Chapter 22 Quiz
1. Differentiate between fixed costs and variable costs and provide two examples of each. What
is the only variable cost that we have been considering in Chapter 22?
Fixed costs do not change as the quantity of output changes. Examples would be rent for a
factory or property taxes on a building the firm owns. No matter how much the firm produces,
even if it’s zero, these costs will not change. Variable costs are costs for inputs (resources) that
change as output changes. Examples would be labor, materials, electricity, and transportation of
goods to market. As firms produce more output, these variable costs will increase. Labor is the
only variable cost we have been considering.
2. What is marginal cost? Marginal cost is the cost of producing one additional unit of output.
3. How do fixed costs affect marginal cost? For example, if fixed costs increase, what will
happen to marginal cost? Fixed costs do not affect marginal cost because marginal cost is the
cost of producing one additional unit of output. Fixed costs don’t change with additional output.
If fixed costs increase, marginal cost will not change.
4. Look at these figures for the Jirsa Bottling Co.
Production Costs
Output (units)
Total Cost ($)
0
1000
500
1300
1000
1500
1500
1600
a. Is this company experiencing increasing marginal returns or decreasing marginal returns over
this range of output? Explain. This company is experiencing increasing marginal returns because
marginal cost is going down as output increases. Producing the first 500 units increases total
cost by $300. Producing the next 500 units only increases total cost by $200, etc. The firm is
experiencing decreasing marginal costs, and since marginal costs and marginal returns are
inversely related, it is experiencing increasing marginal returns.
b. What is the total fixed cost for the Jirsa Bottling Co. $1000 (the total cost when output is
zero).
c. What is the average variable cost when the firm produces 1000 units? $0.50 - $500 in total
variable cost divided by 1000 units of output.
d. What is the marginal cost of the last unit produced?
$0.20 – The additional cost of the last 500 units is $100, so the marginal cost of the last unit is
$100/500 units. Marginal cost is always change in cost/change in output. In this case, you don’t
have data for the last individual unit, so you lump the last 500 units together and solve for
marginal costs for each of them.
5. On your own paper, draw a graph that includes a total fixed cost curve (TFC), a total variable
cost curve (TVC), and a total cost curve (TC). Be sure to label the axes and to maintain the
necessary shapes of the curves and the relationship between the curves.
Should look like this:
6. On your own paper, draw a graph that includes an average fixed cost curve (AFC), and
average variable cost curve (AVC), an average total cost curve (ATC), and a marginal cost curve
(MC). . Be sure to label the axes and to maintain the necessary shapes of the curves and the
relationship between the curves.Should look something like this: Curve A is marginal cost.
Curve B is Average Total Cost. Curve C is Average Variable Cost. Curve D is Average Fixed
Cost. Notice where the marginal cost curve intersects average total cost and average variable
cost – at their minimum points. Notice also that AFC is always decreasing. Notice that the
distance between AVC and ATC = AFC. Notice that both AVC and ATC decrease at first and
then increase. Ask questions tomorrow if you are unsure why any of this is the case.
7. Which cost curves are represented at left?
A. Marginal Cost
B. Average Total Cost
C. Average Variable Cost
D. Average Fixed Cost
8. Which cost curves are represented at left?
A. Total Cost
B. Total Variable Cost
C. Total Fixed Cost
9. What is the gap between curves A and B in the graph above? Total Fixed Cost
10. Explain why the marginal cost curve always intercepts the AVC curve and the ATC curve at
their minimum point. Because, if marginal cost is below AVC, it will pull the AVC down.
Because marginal cost is increasing after a certain point, it will climb toward the AVC curve.
When it intersects the AVC curve, then any further increase in marginal cost will mean that
marginal cost is now greater than AVC and will be pulling AVC up. Because AVC starts
climbing as soon as the marginal cost curve crosses it, that point must be its minimum point.
The exact same holds true for the Average Total Cost curve. See the graph above in #7 for a
visual representation of this.
11. Explain why the Average Fixed Cost curve decreases as quantity increases. Because fixed
cost doesn’t change as output increases. As output quantity increases, you are dividing a
constant number (fixed cost) by an ever larger number (quantity) to get average fixed cost. This
means that average fixed cost decrease as quantity increases.
12. A firm has weekly production figures and fixed costs in the table below. Assume that labor
is its only variable input, and that each worker costs the firm $500/week. Complete the table (you
can round to the nearest dollar).
Labor
units (#
of
workers)
0
1
2
3
4
5
6
Total
Product
(units)
0
2
5
9
12
14
15
Total
Fixed
Cost
$300
300
300
300
300
300
300
Total
Variable
Cost
0
500
1000
1500
2000
2500
3000
Total Average
Cost Fixed
Cost
300
800
1300
1800
2300
2800
3300
Average
Variable
Cost
Average
Total
Cost
Marginal
Cost
(∆Cost/∆Q)
x
250
200
167
167
179
200
x
400
260
200
192
200
220
x
250
167
125
167
250
500
x
150
60
33
35
21
20
13. In your own words (close the book), define the following (explain what each is and how to
calculate it):
fixed costs: Costs that a firm must pay, regardless of the quantity of output.
variable costs: Costs that a firm pays for resources, like labor or materials, that vary as
quantity changes.
total cost: Fixed costs + variable costs.
average fixed cost: Total fixed cost divided by output.
average variable cost: Total variable cost divided by output
average total cost: Total cost divided by output
marginal cost: The cost of producing one additional unit of output. It is equal to the
change in total cost divided by the change in quantity produced (also equal to change in variable
cost divided by change in quantity produced because variable costs are the only costs that are
changing with quantity produced).
14. What factors would cause the cost curves you have learned about to shift up or down?
Explain how each change would affect the curves (which way would they shift)?
For all of these, I say that an increase in costs would shift the curve up, but a decrease in costs
would obviously shift the curve down also. I’m not going to repeat that for each one.
Total Cost Curve: would be shifted up by an increase in either fixed costs or variable costs. Both
of these are elements of total costs.
Total Variable Cost Curve: would be shifted up by an increase in the cost of any input the firm
uses in production. Would also be shifted up by a per-unit tax paid by the seller, which is
essentially an increase in variable costs.
Total Fixed Cost Curve: would be shifted up by any increase in fixed costs, like rent for the
factory or property taxes, or the monthly payment on a truck, etc.
Average Fixed Cost Curve: Same as the Total Fixed Cost Curve.
Average Variable Cost Curve: Same as the Total Variable Cost Curve
Average Total Cost Curve: Same as the Total Cost Curve.
Marginal Cost Curve: Shifted up by an increase in the cost of any variable input (labor,
materials, etc.) Shifted down by a decrease in these costs. Because marginal cost is the cost of
producing an additional unit of output, it is not affected by a change in fixed costs. Only a
change in variable costs will shift the marginal cost curve.
15. Refer to the graph at left:
a. What curve is represented by the question
mark? Average Fixed Cost (always decreasing)
b. Which of these could cause the shift from
AVC1 to AVC2?
(A) an increase in fixed costs
(B) a decrease in fixed costs
(C) an increase in labor costs (only
increase in variable cost listed here)
(D) a decrease in labor costs
16. Refer to the graph at left:
Which of the following would cause an increase in
costs from ATC1 to ATC2 and from MC1 to MC2?
(A) an increase in the rent paid for the firm’s
plant
(B) a per-unit tax on the product paid by the
producer (this is an increase in variable costs,
because the total tax paid will increase as the
quantity produced increases)
(C) a decrease in labor costs
(D) an increase in property taxes paid by the
firm
(E) an increase in fixed costs
100
--
17. Refer to the graph at left:
a. What is the average variable cost at an output of
4 units? $25. Fixed costs are $100 because that is
the total cost at zero output. Total variable cost at
4 units is $100 because total variable cost plus
total fixed cost = total cost, which is $200 at 4
units. Average variable cost = total variable cost
divided by quantity. $100/4 = $25
b. What is the fixed cost at an output of 6 units?
Fixed cost is $100 at 6 units. Fixed cost is $100 at
zero units. Fixed cost is $100 at 1000 units.
Fixed cost is fixed at $100
18. If a firm’s marginal cost is greater than its average total cost, how is average total cost
changing? Average total cost is increasing. See explanation in #10.
19. Which inputs are variable in the long-run? All inputs are variable in the long-run.
20. What factors can lead to economies of scale? Labor specialization, managerial specialization,
efficient capital (expensive machinery capable of efficiently producing large quantities of
goods), etc. See pages 404-405 for an explanation.
21. What factors can lead to diseconomies of scale?
Difficulty managing an enormous company, lack of worker loyalty. Difficulty supervising large
numbers of workers. See page 407 for an explanation.
22. If a firm’s long-run average total cost is decreasing, then the firm is experiencing
______economies of scale____________________________________.
23. If a firm’s long-run average total cost is holding steady, the firm is experiencing
______constant returns to scale____________________________________.
24. If a firm’s long-run average total cost is increasing, then the firm is experiencing
_______diseconomies of scale___________________________________.
See the graph at the top of page 406 for a visual representation.
25. Look at figure 22.7 on page 404. Why would a firm only consider the parts of the 5 different
ATC curves in brown? (Why wouldn’t the parts in green be part of their long-run Average Total
Cost curve?
Because the brown parts of the curves are always less expensive than the green parts. For
example, if the firm wanted to produce 55 units of output, it should choose the plant size
associated with ATC-4. Its only other option is to choose plant size associated with ATC-3, but
costs would be greater with this option. The same applies at every point along the curve. The
plant size associated with the brown segments of the curve always involves lower costs.