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S4 Economics: Costs of Production – Challenge Practice (10 Questions)
S4 Economics: Costs of Production – Challenge Practice (10 Questions)
Ten decision-focused items cover sources and limits of scale economies, the shutdown rule, sunk costs, contribution analysis, break-even output and long-run equilibrium.
Quick answer 1. specialisation, bulk discounts, spread overheads; 2. too many layers, rising coordination cost; 3. price below average variable cost; 4. no; 5. keep producing, 10 per unit contribution; 6. 300 units and 3,000 profit; 7. price equals minimum average cost with zero economic profit; 8. up 12,000 while average falls 20 per cent; 9. diseconomies beyond the optimal scale; 10. keep producing while price beats average variable cost.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 questions |
| Suggested time | about 30 minutes |
| Difficulty mix | Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1 |
| Chapter | Chapter: S4 Economics | Costs of Production: fixed cost, marginal cost and scale |
| Level | S4 |
02 Questions (10 items)
- FoundationWhat are three common sources of economies of scale?
- FoundationWhat usually causes diseconomies of scale?
- FoundationWhen should a firm shut down in the short run?
- FoundationShould a sunk cost be counted in later production decisions?
- IntermediatePrice is 45, average cost 50 and average variable cost 35 at 100 units. Should the firm keep producing in the short run?
- IntermediateFixed cost is 9,000, average variable cost 30 and price 60. What is break-even output, and the profit at 400 units?
- IntermediateIn long-run equilibrium, what holds for price and profit under perfect competition?
- ChallengeAverage cost is 20 at 1,000 units and 16 at 2,000 units. How much does total cost rise, and how far does average cost fall?
- ChallengeWhy is the claim that average cost always falls as output grows wrong?
- Error redoA student says a firm should shut down as soon as it makes a loss. What is wrong?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | Technical specialisation, bulk buying discounts, and spreading management and finance overheads. | All three make each unit cheaper as output grows. |
| 2 | Too many management layers, rising coordination costs and weaker staff motivation. | The bigger the plant, the more costly mistakes and bureaucracy become. |
| 3 | When price falls below average variable cost. | If revenue cannot even cover variable cost, producing more only loses more, so shutting down loses less. |
| 4 | No, a cost already paid and unrecoverable does not affect the marginal decision. | Only future revenue and avoidable costs should enter the comparison. |
| 5 | Yes, each unit still contributes 10 towards fixed cost, while shutting down loses all 1,500 of fixed cost. | Producing pays whenever price beats average variable cost, even if the firm still makes an overall loss. |
| 6 | 300 units, and 3,000 of profit at 400 units. | Each unit contributes 30, so 9,000 divided by 30 gives break-even, and every unit beyond adds 30 of profit. |
| 7 | Price equals minimum average cost, economic profit is zero, and normal profit is still earned. | Positive profit attracts entrants until price is pushed down to minimum average cost. |
| 8 | Total cost rises from 20,000 to 32,000, up 12,000, while average cost falls by 20 per cent. | Total cost rising while average cost falls is exactly what economies of scale look like. |
| 9 | Beyond the optimal scale, diseconomies set in and long-run average cost rises again. | The long-run average cost curve is U-shaped, so expanding past its minimum makes each unit dearer. |
| 10 | If price is above average variable cost, carrying on reduces the loss. | Shutting down saves only variable cost, while fixed cost still has to be paid. |
04 What to do after marking
- After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
- Repeat the same item two days later; move to the next paper only when both attempts are correct.
- Parents only need the answer and note columns; there is no need to explain every item.
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