Question 1.

A firm faces fixed costs of £45 and a short-run variable costs (SAVC).

Output SAVC SAFC SATC STC SMC

1 17

2 15

3 14

4 15

5 19

6 29

(a) State clearly the formula for calculating SAFC SATC STC and SMC, where SAFC is the short-run average fixed cost; SATC is the short-run average total cost; STC is the short-run total cost; and SMC is the short-run marginal cost

(b) Use the formulas stated at (a) to calculate (by showing workings) SAFC SATC STC and SMC, where SAFC is the short-run average fixed cost; SATC is the short-run average total cost; STC is the short-run total cost; and SMC is the short-run marginal cost.

(c) Fill in the remainder of the table, where SAFC is the short-run average fixed cost; SATC is the short-run average total cost; STC is the short-run total cost; and SMC is the short-run marginal cost.

(d) Plot SAVC, SAFC, SATC and SMC, on a graph checking that SMC goes through the minimum points of SAVC and SATC.

(e) The firm finds that it is always receiving orders for six units per week. Advise the firm on how to minimize its costs in the long run.

Question 2

Short- and long run decisions

Short-run decisions Long-run decisions

Price Produce Produce Close Produce Produce Close

at a profit at a loss down at a profit at a loss down

18.00

5.00

7.00

13.00

11.50

Cost conditions are such that LAC is £12; SATC is £17 (made up of SAVC £11 and SAFC £6).

Use the information provided above to calculate (show workings)

i). Produce at profit; produce at a loss; and close down for short-run decisions

ii). Produce at profit; produce at a loss; and close down for Long-run decisions

iii). Use the calculations from (i) and (ii) to fill in the table above.

Question 3

(a) What type of costs do aircrafts represent to airlines?

(b) Explain and evaluate the different strategies used by airlines to deal with the cost of running A380?

The price is based on these factors:

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