Economics Paper 2, May/June. 2015

Question 1

The total fixed cost (TFC) and total cost (TC) functions of a hypothetical firm are shown in the graph below. Study it and answer the questions that follow:

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(a)         Determine the firm’s:
(i)         variable cost at output levels 2, 4 and 6;
(ii)        average total cost at output levels 2 and 3;

marginal cost at output levels 4 and 6.

(b)         If the price of the firm’s product is $40, calculate the firm’s profit or loss when the            following units are sold:
(i)         2 units;
(ii)        4 units.

Observation

This is one of the data response question and it attracted few candidates who performed fairly above average. The question required the candidates to calculate the variable cost, average total cost and marginal cost of a hypothetical firm at various output levels and the profit or loss of the firm when different units of output are sold. Most of the candidates could state the formulae and get the substitution right in the (a) part of the question but could not determine profit or loss in the (b) part of the question as most of them ignored the negative sign in their final answer. This prevented them from obtaining the maximum mark.

The candidates were expected to provide the following answers to score higher marks