Practice Problems (Module 4)

Cost Curves

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks. 

Question #1: How much were Dylan's fixed costs?

Answer: $2,000

Remember the total costs equation...

Total Costs = Fixed Costs + Variable Costs

...with which, we can easily pinpoint in the prompt a Total Costs value of $10,000...

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks. 

$10,000 = Fixed Costs + Variable Costs

...and a Variable Costs value of $8,000...

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks. 

$10,000 = Fixed Costs + $8,000

...leaving us with a Fixed Costs value of $2,000!

$10,000 = Fixed Costs + $8,000
Fixed Costs = $2,000

This serves as our final answer!

Answer: $2,000

Question #2: Dylan’s average total cost was ___ per crewneck.

Answer: $12.50

To compute Average Total Cost (ATC), we'll use the following formula:

ATC = Total Cost / Quantity

From here, we can pinpoint a Total Cost value of $10,000 in the prompt...

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks. 

ATC = $10,000 / Quantity

...for a quantity of 800 units (crewnecks).

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks

ATC = $10,000 / 800

Which, when we solve, results in an ATC of $12.50.

ATC = $10,000 / 800
ATC = $12.50

This serves as our final answer!

Answer: $12.50

Question #3: Dylan’s average variable cost was ___ per crewneck.

Answer: $10

To compute Average Variable Cost (AVC), we'll use the following formula:

AVC = Variable Costs / Quantity

From here, we can pinpoint a Variable Costs value of $8,000 in the prompt...

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks. 

AVC = $8,000 / Quantity

...for a quantity of 800 units (crewnecks).

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks

AVC = $8,000 / 800

Which, when we solve, results in an AVC of $10.

AVC = $8,000 / 800
AVC = $10

This serves as our final answer!

Answer: $10

Question #4: Dylan’s average fixed cost was ___ per crewneck.

Answer: $2.50

To compute Average Fixed Cost (AFC), we'll use the following formula:

AFC = Fixed Costs / Quantity

In Question #1, we determined that the Fixed Costs were equal to $2,000...

Total Costs = Fixed Costs + Variable Costs
$10,000 = Fixed Costs + $8,000
Fixed Costs = $2,000

...which we can plug in like so:

AFC = $2,000 / Quantity

For Quantity, we'll place 800 (since Dylan produced 800 crewnecks).

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were $10,000, his variable costs were $8,000, and he sold 800 crewnecks

AFC = $2,000 / 800

Which, when we solve, results in an AFC of $2.50.

AFC = $2,000 / 800
AFC = $2.50

This serves as our final answer!

Answer: $2.50

Question #5: Dylan will make a profit if his price is set at ______.

A) $13
B) $12
C) $11
D) $10

A) $13
B) $12
C) $11
D) $10

This is the only answer choice above the Average Total Cost (ATC) of $12.50 (which we solved for in Question #2)!

ATC = Total Cost / Quantity
ATC = $10,000 / 800
ATC = $12.50

The rest of the answer choices are below ATC!

Remember: the Average Total Cost (ATC) is the breakeven point at which a sale results in (A) profit or (B) loss.

Still confused? Let's prove it with some simple math!

Considering we can calculate profit with the following equation...

Profit = Total Revenue - Total Cost

...we can determine Total Revenue by multiplying the price the crewnecks were sold at ($13 in this case) by the number of units sold...

Total Revenue = Price x Quantity
Total Revenue = $13 x 800
Total Revenue = $10,400

...and plug it into our Profit equation like so...

Profit = $10,400 - Total Cost

...and then determine the Total Cost by multiplying the Average Total Cost (ATC) of each crewnecks sold by the number of units sold...

Total Cost = ATC x Quantity
Total Cost = $12.50 x 800
Total Cost = $10,000

...and plug it into our Profit equation like so...

Profit = $10,400 - $10,000

...resulting in a profit of $400!

Profit = $10,400 - $10,000
Profit (gain) = +$400

Remember: $13 (Answer Choice A) was the only option above ATC, therefore the only one which would result in a profit.

Let's prove it's the only profitable one by testing out one of the other answer choices that was below ATC! (We'll use Answer Choice B at $12!)

Considering we can calculate profit with the following equation...

Profit = Total Revenue - Total Cost

...we can determine Total Revenue by multiplying the price the crewnecks were sold at ($12 in this case) by the number of units sold...

Total Revenue = Price x Quantity
Total Revenue = $12 x 800
Total Revenue = $9,600

...and plug it into our Profit equation like so...

Profit = $9,600 - Total Cost

...and then determine the Total Cost by multiplying the Average Total Cost (ATC) of each crewnecks sold by the number of units sold...

Total Cost = ATC x Quantity
Total Cost = $12.50 x 800
Total Cost = $10,000

...and plug it into our Profit equation like so...

Profit = $9,600 - $10,000

...resulting in a negative profit (a.k.a. a loss!) of $400!

Profit = $9,600 - $10,000
Profit (loss) = -$400

Considering that all other answer choices are lower than $12...

A) $13 (profit)
B) $12 (loss)
C) $11
D) $10

...it means that we can rest easy knowing that answer choice A is the only one that results in a profit!

A) $13
B) $12
C) $11
D) $10

Considering that answer choice A is the only one above ATC, we can rest easy knowing that answer choice A is the final answer here!

A) $13
B) $12
C) $11
D) $10

Question #6: Dylan will shut down if his price falls below ________.

Answer: $10

Remember: the shutdown point for a firm is whenever the price falls below Average Variable Cost (AVC)!

In Question #3, we determined the AVC to be $10...

AVC = Variable Costs / Quantity
AVC = $8,000 / 800
AVC = $10

...therefore, we can place $10 as our final answer!

Answer: $10

Question #7: Dylan will break even if his price is set at ________.

Answer: $12.50

We touched on this a little bit in Question #5, but to restate: the Average Total Cost (ATC) is the breakeven point at which a sale results in (A) profit or (B) loss.

We proved that in Question #5 when we solved for the profit at a price above $12.50...

Considering we can calculate profit with the following equation...

Profit = Total Revenue - Total Cost

...we can determine Total Revenue by multiplying the price the crewnecks were sold at ($13 in this case) by the number of units sold...

Total Revenue = Price x Quantity
Total Revenue = $13 x 800
Total Revenue = $10,400

...and plug it into our Profit equation like so...

Profit = $10,400 - Total Cost

...and then determine the Total Cost by multiplying the Average Total Cost (ATC) of each crewnecks sold by the number of units sold...

Total Cost = ATC x Quantity
Total Cost = $12.50 x 800
Total Cost = $10,000

...and plug it into our Profit equation like so...

Profit = $10,400 - $10,000

...resulting in a profit of $400!

Profit = $10,400 - $10,000
Profit (gain) = +$400

Remember: $13 (Answer Choice A) was the only option above ATC, therefore the only one which would result in a profit.

Let's prove it's the only profitable one by testing out one of the other answer choices that was below ATC! (We'll use Answer Choice B at $12!)

...and a loss at a price below $12.50.

Considering we can calculate profit with the following equation...

Profit = Total Revenue - Total Cost

...we can determine Total Revenue by multiplying the price the crewnecks were sold at ($12 in this case) by the number of units sold...

Total Revenue = Price x Quantity
Total Revenue = $12 x 800
Total Revenue = $9,600

...and plug it into our Profit equation like so...

Profit = $9,600 - Total Cost

...and then determine the Total Cost by multiplying the Average Total Cost (ATC) of each crewnecks sold by the number of units sold...

Total Cost = ATC x Quantity
Total Cost = $12.50 x 800
Total Cost = $10,000

...and plug it into our Profit equation like so...

Profit = $9,600 - $10,000

...resulting in a negative profit (a.k.a. a loss!) of $400!

Profit = $9,600 - $10,000
Profit (loss) = -$400

Considering that all other answer choices are lower than $12...

A) $13 (profit)
B) $12 (loss)
C) $11
D) $10

...it means that we can rest easy knowing that answer choice A is the only one that results in a profit!

A) $13
B) $12
C) $11
D) $10

However, we didn't prove that a price equal to $12.50 results in zero profit... so let's prove it!

Considering we can calculate profit with the following equation...

Profit = Total Revenue - Total Cost

...we can determine Total Revenue by multiplying the price the crewnecks were sold at ($12.50 in this case) by the number of units sold...

Total Revenue = Price x Quantity
Total Revenue = $12.50 x 800
Total Revenue = $10,000

...and plug it into our Profit equation like so...

Profit = $10,000 - Total Cost

...and then determine the Total Cost by multiplying the Average Total Cost (ATC) of each crewnecks sold by the number of units sold...

Total Cost = ATC x Quantity
Total Cost = $12.50 x 800
Total Cost = $10,000

...and plug it into our Profit equation like so...

Profit = $10,000 - $10,000

...resulting in zero profit!

Profit = $10,000 - $10,000
Profit (zero) = $0

This enables to rest easy with our answer as $12.50 (a.k.a. ATC)!

Answer: $12.50

Use the following information to answer Questions 8-11: Dylan's business grew from 2022 to 2023. In 2023, he experienced the following costs in the table below.

OutputAFCAVCATCMC
1$10$10$20-
2$5$12$1714
3$3.33$13$16.3315
4$2.50$15$17.5021

Question #8: The total variable cost of producing 3 units is __________.

Answer: $39

We're looking for the total variable cost here...

Question #8: The total variable cost of producing 3 units is __________.

...but we're only given the average variable cost at each level of output.

OutputAFCAVCATCMC
1$10$10$20-
2$5$12$1714
3$3.33$13$16.3315
4$2.50$15$17.5021

That means we must multiply the average variable cost (AVC) at 3 units...

Question #8: The total variable cost of producing 3 units is __________.

...which can be pinpointed here ($13)...

OutputAFCAVCATCMC
1$10$10$20-
2$5$12$1714
3$3.33$13$16.3315
4$2.50$15$17.5021

...by the quantity of units sold to determine the total variable cost!

Total Variable Cost = AVC x Quantity
Total Variable Cost = $13 x 3
Total Variable Cost = $39

This serves as our final answer!

Answer: $39

Question #9: The average fixed cost of producing 1 unit is __________.

Answer: $10

Unlike Question #8, this question requires no math. We're being asked for the average fixed cost (AFC)...

Question #9: The average fixed cost of producing 1 unit is __________.

...at 1 unit of output...

Question #9: The average fixed cost of producing 1 unit is __________.

...which can be found right here!

OutputAFCAVCATCMC
1$10$10$20-
2$5$12$1714
3$3.33$13$16.3315
4$2.50$15$17.5021

This serves as our final answer! It's that easy!

Answer: $10

Question #10: The marginal cost of producing the 4th unit is __________.

Answer: $21

This one, like Question #9, is as simple as pinpointing the marginal cost...

Question #10: The marginal cost of producing the 4th unit is __________.

...at 4 units of output...

Question #10: The marginal cost of producing the 4th unit is __________.

...which can be located here:

OutputAFCAVCATCMC
1$10$10$20-
2$5$12$17$14
3$3.33$13$16.33$15
4$2.50$15$17.50$21

This serves as our final answer!

Answer: $21

Question #11: The total cost of 2 units is __________.

Answer: $34

This one is going to require some math, as we're looking for the total cost...

Question #11: The total cost of 2 units is __________.

...but are only given the average total cost.

OutputAFCAVCATCMC
1$10$10$20-
2$5$12$1714
3$3.33$13$16.3315
4$2.50$15$17.5021

That means we must multiply the average total cost (ATC) at 2 units...

Question #11: The total cost of 2 units is __________.

...which can be pinpointed here ($17)...

OutputAFCAVCATCMC
1$10$10$20-
2$5$12$1714
3$3.33$13$16.3315
4$2.50$15$17.5021

...by the quantity of units sold to determine the total cost!

Total Cost = ATC x Quantity
Total Cost = $17 x 2
Total Cost = $34

This serves as our final answer!

Answer: $34

Use the following information to answer Questions 12-15:

Question #12: If this firm wanted to maximize their profit, they'd set their price to ___________ and their quantity to ______________.

Answer: $30, 4 units

Remember: the profit maximizing point for any firm is where MR = MC!

We can pinpoint this point here on our graph...

...which aligns to 4 units of output.

Answer: $???, 4 units

Now... how can we identify price?

Don't make the mistake of going directly to the left from the point where MR = MC!! We've gotta go up to the demand (D) curve...

...and then to the left to pinpoint our price of $30! This results in our final answer!

Answer: $30, 4 units

The reason we go up to the demand (D) curve is because that's the price that our consumers are willing to pay (at 4 units of output). If we set our price to anything less that what consumers were willing to pay... we'd be missing out on profit!

Question #13: At this profit maximizing point, the firm's total costs are _____________.

Answer: $60

We're not given a total cost (TC) curve in this graphic, however we are given the average total cost (ATC) curve!

Remember: In Question #12, we determined we're producing 4 units of output at the profit maximizing point (where MR = MC)...

...which aligns to an ATC value of $15...

...therefore, to determine total cost, we can utilize the following formula...

Total Cost = ATC x Quantity
Total Cost = $15 x 4
Total Cost = $60

...resulting in $60, which can be represented visually like so!

This serves as our final answer!

Answer: $60

Question #14: At this profit maximizing point, the firm's total revenue is _____________.

Answer: $120

Remember: In Question #12 we determined that our profit maximizing point was at 4 units...

...at a price of $30 (since that's our consumers' willingness to pay at 4 units of output).

Therefore, we can use the following formula to calculate Total Revenue...

Total Revenue = Price x Quantity
Total Revenue = $30 x 4
Total Revenue = $120

...resulting in $120, which can be represented visually like so:

This serves as our final answer!

Answer: $120

Question #15: At this profit maximizing point, the firm's total profit is _____________.

Answer: $60

In Question #14, we solved for the total revenue here...

...and in Question #13, we solved for the total costs here...

...therefore, visually we can see the total profit here...

...which makes sense, as this aligns to the area above ATC and below price...

...which, when we compute mathematically, equals $60 as expected!

Profit = (P - ATC) x Quantity
Profit = ($30 - $15) x 4
Profit = $60

This serves as our final answer!

Answer: $60

Implicit vs. explicit costs

Question #16: One of your roommates runs a small nail salon out of your dorm room. Her total costs are $300 and her implicit costs are $200. What are her explicit costs? 

Answer: $100

We can lean on the equation for economic costs here...

Economic Costs = Explicit Costs + Implicit Costs

In this situation, the question tells us that the total (economic) costs are $300...

Question #16: One of your roommates runs a small nail salon out of your dorm room. Her total costs are $300 and her implicit costs are $200. What are her explicit costs? 

$300 = Explicit Costs + Implicit Costs

...and the implicit costs are $200...

Question #16: One of your roommates runs a small nail salon out of your dorm room. Her total costs are $300 and her implicit costs are $200. What are her explicit costs? 

$300 = Explicit Costs + $200

...therefore, resulting in an explicit costs value of $100!

$300 = Explicit Costs + $200
Explicit Costs = $100

This is our final answer!

Answer: $100

Market structures

Question #17: Imagine a given market is competitive, and firms are making profit. This means that we could expect firms to _____________ the market.

A) enter
B) exit

A) enter
B) exit

Remember: When working in markets of competitive firms, in the long-run they operate at zero economic profits.

This means that if in the short-run firms are making profit, other competitors will enter the market to get in on that profit! Over time as more and more competitors enter the market, the economic profits return back to zero.

That's why we choose answer choice A!

Question #18: Based on Question #17, we can expect the supply curve to shift to the ____________.

A) left
B) right

A) left
B) right

In the Supply article, we cover that the "Number of sellers" is a shifter of the supply curve.

In Question #17, we determined that firms will be entering the market... meaning there will be more firms... a.k.a. more supply.

More supply means that the supply curve will shift to the right! This corresponds with answer choice B!

Question #19: Based on Question #17, will these firms be making a profit in the long-run?

A) Yes
B) No

A) Yes
B) No

We skimmed over this in Question #19, but let's revisit it: in competitive markets, they make zero profit in the long-run.

This can be mainly attributed to the fact that competitive markets have (1) low barriers to entry, (2) make identical products, and (3) consumers are indifferent to which producer they choose to buy from.

Over the long-run, these 3 characteristics, result in the long-run profit equaling zero. Firms will enter / exit the market until there's no more economic profit to reap!

This correlates to answer choice B!

Question #20: Competitive firms are price __________.

A) makers
B) takers

A) makers
B) takers

Competitive firms enter markets in which they produce identical products to all the other firms already in the market. There's very little they can do to differentiate themselves from their competition!

And without that differentiation... there'd be very little reason for consumers to pay more for their product than their competitor producing the same thing down the street!

That's why competitive firms are price takers!

Question #21: Monopolies are price __________.

A) makers
B) takers

A) makers
B) takers

Monopolies, on the other hand, have much higher barriers of entry, resulting in no competitors being able to come into their market and produce a similar / identical good.

Consumers must go to the monopoly and only the monopoly to get their product... giving the monopoly power in setting whatever price they choose!

Thus, monopolies are price makers!

Question #22: Competitive firms should produce where _____________.

A) P = ATC
B) MR = MC
C) P = AVC
D) MR = ATC

A) P = ATC
B) MR = MC
C) P = AVC
D) MR = ATC

The profit maximizing point for any firm is where MR = MC!

Think about it:

  • If your MR > MC, that means that the revenue (MR) gained for one more unit sold is greater than the cost (MC) of producing that good... so you'd make more money selling another unit!
  • If your MR < MC, that means that the revenue (MR) gained for one more unit sold is less than the cost (MC) of producing that good... so you'd lose money selling another unit!

You might be wondering: don't competitive firms make zero profit in the long-run? Do they still produce where MR = MC?

Yes, they do!

It's just that in the long-run for competitive firms, the ATC ends up equaling where MR = MC, resulting in zero economic profit!

Question #23: Monopolies should produce where _____________.

A) P = ATC
B) MR = MC
C) P = AVC
D) MR = ATC

A) P = ATC
B) MR = MC
C) P = AVC
D) MR = ATC

The profit maximizing point for any firm is where MR = MC!

Same principle as last question's explanation...

  • If your MR > MC, that means that the revenue (MR) gained for one more unit sold is greater than the cost (MC) of producing that good... so you'd make more money selling another unit!
  • If your MR < MC, that means that the revenue (MR) gained for one more unit sold is less than the cost (MC) of producing that good... so you'd lose money selling another unit!

Different from competitive markets, monopolies are typically able to reap some short & long run profit by operating at MR = MC!

Question #24: You are the consultant for a well-known monopoly. You come to find out that their current marginal cost is $20 and their marginal revenue is $35, so you recommend that they ______________.

A) They should continue production at the same quantity 
B) They should shut down entirely
C) They should produce more
D) They should produce less

A) They should continue production at the same quantity 
B) They should shut down entirely
C) They should produce more
D) They should produce less

Think about it this way: the cost of producing one more unit of product (a.k.a. the marginal cost, or MC) is $20.

Question #24: You are the consultant for a well-known monopoly. You come to find out that their current marginal cost is $20 and their marginal revenue is $35, so you recommend that they ______________.

That's less than the revenue of selling one more unit of product (a.k.a. the marginal revenue, or MR), which is $35.

Question #24: You are the consultant for a well-known monopoly. You come to find out that their current marginal cost is $20 and their marginal revenue is $35, so you recommend that they ______________.

In other words... we can make $35 - $20 = $15 in profit by selling one more unit!

So... why miss out on that profit?? The firm should produce more to gain that profit! Otherwise, they're missing out on profit sitting right in front of them!

This correlates to answer choice C!

A) They should continue production at the same quantity 
B) They should shut down entirely
C) They should produce more
D) They should produce less

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