These are original Marlbridge practice questions, not past exam questions. The mark points are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. All firms and data are fictional. A four-function calculator is enough. Give costs to the nearest cent.
Question 1 uses Penrose Candles, a fictional firm. Output is boxes of candles per day; total fixed cost is $40 per day.
| Output (boxes per day) | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Total cost ($) | 40 | 70 | 90 | 105 | 125 | 160 |
Question 1 (multiple choice · foundation)
What is the marginal cost of the fourth box of candles?
- (A) $21.25
- (B) $31.25
- (C) $125.00
- (D) $20.00
Answer and explanation
Answer: (D). MC = ΔTC ÷ ΔQ = (125 − 105) ÷ 1 = $20.
- (A) is average variable cost at 4 boxes: (125 − 40) ÷ 4. It divides instead of finding the change.
- (B) is average total cost at 4 boxes: 125 ÷ 4.
- (C) is total cost at 4 boxes, a level rather than a change.
Question 2 (multiple choice · core)
A city doubles the yearly licence fee that every food truck must pay, whatever its sales. For a food truck, which short-run cost curves shift upward?
- (A) Marginal cost, average variable cost and average total cost
- (B) Marginal cost only
- (C) Average fixed cost and average total cost only
- (D) All of the short-run cost curves
Answer and explanation
Answer: (C). The licence fee does not depend on output, so it is a fixed cost. TFC rises, so AFC (TFC ÷ Q) and ATC (AFC + AVC) shift up.
- (A) treats the fee as a variable cost. A fixed fee does not change the cost of producing one more meal, so MC and AVC stay the same.
- (B) gets it backwards: MC is the one curve a fixed cost can never shift.
- (D) is wrong because MC and AVC do not change.
Question 3 (multiple choice · core)
At a firm’s current output, marginal cost is below average variable cost. Which statement must be true?
- (A) Average total cost is rising.
- (B) Average variable cost is falling.
- (C) Marginal cost is falling.
- (D) Average fixed cost is rising.
Answer and explanation
Answer: (B). When the cost of the next unit is below the average, it pulls the average down, so AVC is falling.
- (A) is wrong: ATC is always above AVC, so MC is also below ATC, and ATC must be falling too.
- (C) need not be true. MC can already be rising while still below AVC: this happens between the minimum of MC and the minimum of AVC.
- (D) is never true. AFC falls at every output because the same fixed cost is spread over more units.
Question 4 (calculation · core)
Quill & Ink is a fictional stationery maker. Output is boxes of notebooks per day.
| Output (boxes per day) | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Total cost ($) | 50 | 90 | 120 | 146 | 178 | 225 |
(a) What is total fixed cost? Explain how you know. (b) Calculate TVC, MC, AFC, AVC and ATC at each output from 1 to 5. (c) At what output is ATC lowest? At what output is AVC lowest? (d) Use your MC values to explain why ATC rises from 4 boxes to 5 boxes.
Worked solution
(a) $50. At zero output there is no variable cost, so TC = TFC.
(b) TVC = TC − 50; MC = change in TC; AFC = 50 ÷ Q; AVC = TVC ÷ Q; ATC = TC ÷ Q.
| Q | TVC ($) | MC ($) | AFC ($) | AVC ($) | ATC ($) |
|---|---|---|---|---|---|
| 1 | 40 | 40 | 50.00 | 40.00 | 90.00 |
| 2 | 70 | 30 | 25.00 | 35.00 | 60.00 |
| 3 | 96 | 26 | 16.67 | 32.00 | 48.67 |
| 4 | 128 | 32 | 12.50 | 32.00 | 44.50 |
| 5 | 175 | 47 | 10.00 | 35.00 | 45.00 |
(c) ATC is lowest at 4 boxes ($44.50). AVC is lowest at 3 and 4 boxes ($32.00), where the fourth box’s MC ($32) equals AVC. As expected, ATC’s minimum is not to the left of AVC’s.
(d) The fifth box’s MC is $47, which is above the ATC of $44.50 at 4 boxes. A marginal value above the average pulls the average up, so ATC rises to $45.00.
Suggested mark points (4): 1 for TFC = $50 with the reason; 1 for TVC and MC; 1 for AFC, AVC and ATC; 1 for (c) and (d) with the MC-versus-ATC comparison.
Common error: computing MC as TC ÷ Q. That gives ATC, not MC.
Question 5 (graph · core)
(a) Draw a correctly labelled graph showing a firm’s short-run MC, ATC, AVC and AFC curves. (b) The price of a raw material that the firm uses in every unit of output rises. On your graph, show the new position of each curve that shifts. (c) Explain why AFC does not shift in (b).
Model answer and suggested Marlbridge rubric
(a) Horizontal axis: “Output (units per period)”. Vertical axis: “Cost ($ per unit)”. MC falls briefly, then rises. AVC and ATC are U-shaped, with ATC above AVC and the gap between them narrowing as output rises. MC cuts AVC at its minimum and then ATC at its minimum, at a larger output. AFC slopes down throughout, getting closer to the horizontal axis without touching it.
(b) The raw material is a variable input, so MC, AVC and ATC all shift up (draw MC₂, AVC₂, ATC₂). MC₂ must still pass through the minimum points of AVC₂ and ATC₂.
(c) AFC = TFC ÷ Q. A raw material bought for each unit is not part of fixed cost, so TFC, and therefore AFC, are unchanged at every output.
| Point | What earns it |
|---|---|
| 1 | Axes labelled (output; cost per unit) and all four curves labelled |
| 1 | AVC and ATC U-shaped with MC cutting each at its minimum, ATC’s minimum to the right of AVC’s |
| 1 | AFC downward-sloping and the ATC–AVC gap narrowing |
| 1 | MC, AVC and ATC shifted up, with AFC unchanged |
| 1 | Explanation that the material is a variable cost, so TFC and AFC do not change |
Do not award the second point if MC cuts ATC to the left of AVC’s minimum.
Question 6 (constructed response · core)
Oakvale Car Wash is a fictional business. It rents its site for $300 per day and pays each worker $100 per day. Workers are the only variable input.
| Workers | 0 | 1 | 2 | 3 | 4 |
|---|---|---|---|---|---|
| Cars washed per day | 0 | 20 | 50 | 70 | 80 |
(a) Calculate the marginal cost per car of the cars washed by each worker. (b) Explain why marginal cost falls and then rises, using production concepts. (c) Calculate AVC and ATC at 50 and at 70 cars. (d) A free upgrade to the wash equipment raises every worker’s marginal product by 25%. Calculate the new marginal cost per car for the cars washed by the third worker, and state what happens to the MC, AVC and ATC curves.
Model answer and suggested Marlbridge rubric
(a) MC per car = wage ÷ MP. MPs are 20, 30, 20 and 10 cars. MC: 100 ÷ 20 = $5.00; 100 ÷ 30 = $3.33; 100 ÷ 20 = $5.00; 100 ÷ 10 = $10.00.
(b) With two workers, they can specialise (one soaps, one rinses), so MP rises from 20 to 30 and MC falls. From the third worker, diminishing marginal returns set in: the site and equipment are fixed, so each extra worker adds fewer cars (20, then 10). Each car then needs more labour time, so MC rises.
(c) At 50 cars: AVC = 200 ÷ 50 = $4.00; ATC = 500 ÷ 50 = $10.00. At 70 cars: AVC = 300 ÷ 70 = $4.29; ATC = 600 ÷ 70 = $8.57.
(d) New MP = 20 × 1.25 = 25 cars, so MC = 100 ÷ 25 = $4.00 (down from $5.00). Higher productivity lowers the cost of each car: the MC, AVC and ATC curves shift down. TFC and AFC do not change, because the upgrade adds nothing to fixed cost.
| Point | What earns it |
|---|---|
| 1 | All four MC values correct |
| 1 | Falling MC linked to specialisation and rising MC linked to diminishing marginal returns with a fixed input |
| 1 | AVC and ATC correct at both outputs |
| 1 | New MC of $4.00 and MC, AVC, ATC shift down |
Accept $3.33 written as $3.3 recurring.
Question 7 (explanation · stretch)
The manager of Hollins Joinery, a fictional firm, says: “Our fixed costs are high, so the more we produce, the lower our average total cost will be.” You are given:
| Output (units per week) | 200 | 400 | 500 |
|---|---|---|---|
| ATC ($) | 15.00 | 13.00 | 13.60 |
| AVC ($) | 11.00 | ? | ? |
(a) Calculate total fixed cost. (b) Calculate AFC and AVC at 400 and at 500 units. (c) Calculate total cost at each output and the average marginal cost per unit from 200 to 400 and from 400 to 500 units. (d) Evaluate the manager’s statement.
Model answer and suggested Marlbridge rubric
(a) At 200 units, AFC = ATC − AVC = 15 − 11 = $4. TFC = 4 × 200 = $800.
(b) At 400: AFC = 800 ÷ 400 = $2.00; AVC = 13.00 − 2.00 = $11.00. At 500: AFC = 800 ÷ 500 = $1.60; AVC = 13.60 − 1.60 = $12.00.
(c) TC = ATC × Q: $3,000, $5,200 and $6,800. From 200 to 400: (5,200 − 3,000) ÷ 200 = $11 per unit. From 400 to 500: (6,800 − 5,200) ÷ 100 = $16 per unit.
(d) The manager is partly right. Spreading the $800 of fixed cost does lower AFC at every output ($4.00 → $2.00 → $1.60). From 200 to 400 units, MC ($11) is below ATC ($15), so ATC falls. But from 400 to 500, AVC rises ($11 → $12) because of diminishing marginal returns, and MC ($16) is above ATC ($13). The $0.40 fall in AFC is smaller than the $1.00 rise in AVC, so ATC rises to $13.60. ATC falls only until MC reaches it; beyond its minimum, producing more raises average total cost.
| Point | What earns it |
|---|---|
| 1 | TFC = $800 from ATC − AVC = AFC |
| 1 | AFC and AVC correct at 400 and 500 |
| 1 | TC values and both MC values correct |
| 1 | Evaluation recognises falling AFC and rising AVC (or MC above ATC) |
| 1 | Clear conclusion that ATC eventually rises, with diminishing marginal returns as the cause |
How did you do?
- Q1 or Q4 wrong: re-read “The seven cost measures” and Worked example 1 in the study guide. MC is a change; averages are ratios.
- Q2 or Q5(b) wrong: re-read “What shifts the cost curves”. Decide first whether the cost is fixed or variable.
- Q3 or Q7 incomplete: re-read “Why the cost curves have their shapes”, especially the average–marginal rule.
- Q6 wrong: re-read Worked example 2 on MC = w ÷ MP.
Then tick off the topic checklist.