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 1 (1 point)

If we make...
0 Bouquets, we make -$10 profit (we owe for rent).
If we make/sell 1 Bouquet for $6, we buy $7 raw flowers/labor (VC) and have $10 rent, our total cost is $17 (TC) we have -$11 profit.

• Rent $10
• Flowers $7
• Price $6

What is fixed cost FC and what is variable cost VC?

a	FC $10; VC $7
b	FC $7; VC $10
c	FC $10; VC $17
d	FC $0; VC $17

Question 2 (1 point)

If we make 2 Bouquets per day, we can buy higher quantity of flowers (enough for 2) which will be cheaper $12 (VC). Our total costs is $22; avg cost per Bouquet is $11 (ATC).

Marginal cost (MC) or additional cost to make the 2nd Bouquet is $5 ($12-$7).

What is our profit at 2 Bouquets?

a	$22-$12 = $10 profit
b	$12-$22 = -$10 loss
c	$12-$12 = $0 profit
d	$12-$10 = $2

Question 3 (1 point)

As you can see, our costs keep going down when we make more daily.

If we make 3 daily, we could make $18; variable cost $16 (this is given-you wouldn't otherwise know); total cost $26 (TC); average total cost per unit $9 (ATC). But average price is $6 so we still aren't making a profit.

Notice that fixed costs (rent) becomes a smaller piece of each unit.

What is the marginal cost (MC) of the 3rd unit?

a	$26-$22 = $4
b	$10+$16 = $26
c	$0
d	$18-$26 = -$8

Question 4 (1 point)

At the 4th unit, our variable costs (VC) go down further as we get more efficient in production and bulk-buying - $20 VC.

What is the ATC (average total cost)?

a	$30
b	$30/4 = $7.4
c	$0
d	$30-$24= -$6

Answer 1

Solution:

1. We are given the rent amount (fixed cost) = $10, flower cost (variable cost) = $7, and price = $6 per bouquet

So, the fixed cost = $10, and variable cost = $7. Thus, the correct option is (A) FC = $10; VC = $7.

2. Profit = total revenue - total cost

As each bouquet price is $6, with two bouquets, total revenue = 6*2 = $12

Total cost = $22

So, profit = 12 - 22 = -$10

Thus, the correct option is (B) $12 - $22 = -$10 loss

3. Marginal cost of 3rd bouquet = total cost at 3 bouquets - total cost at 2 bouquets

Marginal cost of 3rd bouquet = 26 - 22 = $4

Thus, the correct option is (A) $26 - $22 = $4

4. Since, total cost = fixed cost + variable cost, with variable cost of $20 at 4 boquets, total cost = 10 + 20 = $30

Average total cost = total cost/quantity of bouquets

ATC = 30/4 = 7.5

Thus, the correct option is (B) $30/4 = 7.5