This question was popular but not well answered by the candidates.  Majority of those that attempted it did not do well in it.  In ‘a’ part of the question, the first two parts were partially understood by candidates but they lacked understanding of the demand of b(i).  It was evident that candidates were not well familiar with the theory of cost concepts.  In the same vein, it seemed that candidates did not know the relationship between average cost and price, hence  their conclusion in  b(ii) was also wrong.  All these shortcomings were responsible for the low performance in the question.  Some of the answers expected from candidates included:

 (a) (i) Fixed Costs are expenses that remain unchanged whatever the level of output e.g. money spent on the purchase of land, rent payment, purchase of tools and machinery, etc. while variable costs are expenses that change with the level of output e.g. expenses on raw materials, fuel, electricity, maintenance of fixed assets etc.

(ii) Real Cost is the goods and services forgone by employing the resources in their best or most profitable alternative uses while Money Cost is the amount of money spent to produce a particular good or service.

 (iii) Implicit Cost are the costs of the resources supplied by the owners e.g. owners managerial skills, financial resources and owner-occupied buildings while explicit costs are payments that are made for resources purchased from outside e.g. payment for labour services, fuel electricity, raw materials and transportation.

(b) (i)   The firm should stay open in the short run if price is greater than AVC. The firm should shut down in the long run.
      (ii) Any further production will add to losses in the long run.