Question

Go through this test a few times to learn about output. Get graph paper ready.

Assume we rent a floral booth which will sell flower bouquets. We only have a fixed $10 table rent (FC) but have variable costs depending on how many bouquets we make. These bouquets are a commodity and the market price is $6 (P).

Watch for how variable costs VC go down, then up. Also, what marginal cost MC is.

Question 5 (1 point)

If we sell the 4th unit, still at $6, we can gross (TR) $24. Not enough to make a profit (-$5.50 loss), but making 4 Bouquets is definitely more efficient!

Use/make graph paper with 10 lines on each side or use Excel. Graph this chart, up to 8 units:
Units | Fixed Cost | Variable Cost | Total Cost | Avg Total Cost | MC | Price | Total Revenue | Profit

#	FC	VC	TC	ATC	MC	P	TR	Pr
0	$10	$0	$10				$0	-$10
1	10	7	17	$17	$7	$6	6	-11
2	10	12	22	11	5	6	12	-10
3	10	16	26	8.7	4	6	18	-8
4	10	20	30	7.4	3.5	6	24	-5.5
5	10	23	33	6.6	3.5	6	30	-3
6	10	27	37	6.2	4	6	36	-1
7	10	32	42	6	5	6	42	0
8	10	39	49	6.1	7	6	48	-1
9	10	49	59	6.6	10	6	54	-5

Do you understand how each number goes up or down? Notice how MC works?

At what quantity is MC lowest?

a	Qty 1
b	Qty 8
c	It is the same at every quantity
d	Qty 4 and 5

Question 6 (1 point)

On graph paper, use Qty for the x horizontal axis. You will have 3 lines at y: Price, MC, ATC.

Notice as we make more at a time, our efficiency increases, but only to a certain point.

If we try to do too much we make mistakes, run into each other, run out of fixed expense assets, etc. and VC goes back up. This is not a time graph - it's a chart that you can see where the optimal production "speed" is.

Look on your graph where MC rises and crosses Price. What is the quantity?

Qty	FC	VC	TC	ATC	MC	P	TR	Pr
0	$10	$0	$10				$0	-$10
1	10	7	17	$17	$7	$6	6	-11
2	10	12	22	11	5	6	12	-10
3	10	16	26	8.7	4	6	18	-8
4	10	20	30	7.4	3.5	6	24	-5.5
5	10	23	33	6.6	3.5	6	30	-3
6	10	27	37	6.2	4	6	36	-1
7	10	32	42	6	5	6	42	0
8	10	39	49	6.1	7	6	48	-1
9	10	49	59	6.6	10	6	54	-5

a	Over 8
b	Around 2 - 4
c	Around 7 - 8
d	Around 5 - 6

Question 7 (1 point)

See how much "space" there is between ATC and Price. This represents economic profit. Is there a lot of economic profit?

a	Huh?
b	No, none or very little.
c	Yes, a lot.

Question 8 (1 point)

Can you change the price up to make more profit or down to get more buyers?

a	Yes
b	No

Answer 1

Solution:

5. Given the table, we can clearly see that the lowest value for marginal cost (MC) is $3.5, which corresponds to quantity levels or bouquets quantity of 4 and 5.

Thus, the correct option is (D).

6. MC starts rising from quantity of 5 bouquets, and reaches the price level of $6 between quantity of 7 and 8, as the MC at these two quantity levels is surrpounding 6 (MC = 5 when quanity = 7, MC = 7 when quantity = 8).

Thus, the correct option is (C).

7. At this quantity level of around 7 and 8, price is fixed at $6, while average total cost (ATC) is around 6 and 6.1. So, the space is somewhere around (price - quantity =) 6 - 6 = 0 and 6 - 6.1 = -0.1. So, clearly the profit is either very little (loss is little) or none at all.

Thus, the correct option is (B).

8. As the price is fixed across all quantity levels, in which case we are in a highly competitive market and do not have the power to change the price. We can only decide the quantity to produce and sell, depending on the corresponding optimum profit earned.

Thus, the correct option is (B).