Microeconomics — Production Costs
Microeconomics — Production Costs. Practice questions to deepen understanding of production costs. Online economics practice with full solutions and step-by-step explanations.
Production costs practice — 25 questions on FC, VC, TC, MC, sunk vs non-sunk costs, total revenue, profit.
Production costs, fixed costs, variable costs, total costs, FC, VC, TC, marginal cost, MC, sunk costs.
🏢 What is fixed cost (FC)?
💡 Explanation:
FC - Fixed Cost = fixed costs
Costs that do not change with the quantity produced.
Examples: rent, property tax, insurance, business license.
📦 What is variable cost (VC)?
💡 Explanation:
VC - Variable Cost = variable costs
Costs that change with the quantity produced.
Examples: wages, raw materials, packaging.
🔒 What is a sunk fixed cost?
💡 Explanation:
Sunk fixed cost:
A cost that the producer must pay even if they do not produce anything!
Examples: rent, property tax - paid even if the factory is closed.
🔓 What is a non-sunk fixed cost?
💡 Explanation:
Non-sunk fixed cost:
A fixed cost that the producer does not pay if they decide not to produce.
Example: a foreman's salary - if the factory is closed, no foreman is needed.
📊 What is the formula for total cost (TC)?
💡 Explanation:
TC - Total Cost = total cost
TC = FC + VC
Total costs = fixed costs + variable costs
⚡ What is marginal cost (MC)?
💡 Explanation:
MC - Marginal Cost = marginal cost
By how much costs increased when quantity increased by one unit.
MC = ΔTC / ΔQ = ΔVC / ΔQ
💵 What is the formula for total revenue (TR)?
💡 Explanation:
TR - Total Revenue = total revenue
The total income of the producer from selling products.
TR = P × Q
Revenue = price × quantity
📈 What is the formula for profit (π)?
💡 Explanation:
π (pi) = profit
π = TR - TC
Profit = revenue - total costs
✏️ Given: TC = 500 + 20Q
What is the fixed cost (FC)?
💡 Explanation:
TC = FC + VC = 500 + 20Q
FC is the part that does not depend on Q.
FC = 500
VC = 20Q (depends on quantity)
✏️ Given: TC = 1000 + 30Q
What is VC when Q=10?
💡 Explanation:
VC = 30Q
When Q=10:
VC = 30 × 10 = 300
✏️ Given: TC(5) = 200, TC(6) = 225
What is the marginal cost (MC) of the 6th unit?
💡 Explanation:
MC = ΔTC / ΔQ
MC = (225 - 200) / (6 - 5) = 25 / 1 = 25
✏️ Given: P = 40$, Q = 50 units
What is the total revenue (TR)?
💡 Explanation:
TR = P × Q
TR = 40 × 50 = 2,000$
✏️ Given: TR = 1,500$, TC = 1,200$
What is the profit?
💡 Explanation:
π = TR - TC
π = 1,500 - 1,200 = 300$
✏️ Given: W = 100$ (wage per worker), MP = 5
What is the marginal cost (MC)?
💡 Explanation:
MC = W / MP
MC = 100 / 5 = 20$
Each unit costs 20$ (100$ for a worker who produces 5 units).
✏️ Given: FC = 200, VC = 800, Q = 100
What is TC?
💡 Explanation:
TC = FC + VC
TC = 200 + 800 = 1,000
✏️ According to the table, what is the MC of the 3rd unit?
| Q | TC |
|---|---|
| 0 | 100 |
| 1 | 150 |
| 2 | 180 |
| 3 | 220 |
💡 Explanation:
MC(3) = TC(3) - TC(2)
MC(3) = 220 - 180 = 40
🔄 What is the relationship between MC and MP?
💡 Explanation:
MC = W / MP
MP is in the denominator, therefore:
- When MP rises → MC falls
- When MP falls → MC rises
📈 When MP is at a maximum, what is the state of MC?
💡 Explanation:
MC = W / MP
When MP is at a maximum (highest) → MC at a minimum (lowest).
Logic: when the worker is most efficient - the cost per unit is the lowest!
✏️ Given: W = 200$. MP rose from 4 to 8.
What happened to MC?
💡 Explanation:
Before: MC = W/MP = 200/4 = 50$
After: MC = W/MP = 200/8 = 25$
MP doubled → MC halved!
🔄 According to the law of diminishing marginal product, what will happen to MC?
💡 Explanation:
The law of diminishing marginal product → MP eventually falls.
MC = W/MP → when MP falls, MC rises.
Therefore the MC curve is generally U-shaped.
📊 What does MC represent graphically?
💡 Explanation:
MC = ΔTC/ΔQ = ΔVC/ΔQ
This is the slope of the TC and VC curves.
Note: FC does not affect MC because it is constant!
📋 Claim: "If Q=0, then TC=0 too."
Is the claim correct?
✗ The claim is incorrect!
When Q=0: TC = FC + VC = FC + 0 = FC
There are fixed costs even if there is no production!
📋 Claim: "The VC curve starts from the origin."
Is the claim correct?
✓ The claim is correct!
If there is no production (Q=0), there are no variable costs (VC=0).
Therefore the VC curve starts from the origin (0,0).
📋 Claim: "The TC curve and the VC curve are parallel."
Is the claim correct?
✓ The claim is correct!
TC = FC + VC
The difference between TC and VC is always FC (constant).
Therefore the curves are parallel - same slope (MC).
📋 Claim: "For the producer to earn a profit, P > ATC must hold."
Is the claim correct?
✓ The claim is correct!
Average profit = P - ATC
For profit to be positive:
P > ATC